Principal-Agent Model in Economics and Political Science essay

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Principal-Agent Model in Economics and Political Science

The international political perspectives of free trade

A Global Analysis

International Trade Impact on Tunisia

The Export of agricultural products

International trade and development of Tunisia

Balance in the Trade Regime

Imports and exports of Tunisia



Coping With External and Internal Pressures

The Common External Tariff (CET)

Safeguard Measures

Anti-Dumping Duties (ADDs) and Countervailing Duties (CVDs)

Rules of origin

The New Commercial Policy Instrument

Sector Based Aspects

GATT/WTO's Main Principles

Non-discriminatory trade

Multilateral negotiation and free trade

The Trading Policies of European Union

Critical Political Economy


The Gross Domestic Product of Tunisia

The Real Data Analysis of Import Export Companies in Tunisia

The Smith Co Company

The Softkim and Lovers Limited

The Impact of Free Trade on Tunisia Trading 43

Findings 44

Conclusion 44

References 46



Africa, the Caribbean, and the Pacific


Alternative Mediterranean Conference


Asia-Pacific Economic Cooperation Conference


Association of South-East Asian Nations


Confidence-building measures


Central and Eastern European countries


Common Foreign and Security Policy


Conference for Security and Co-operation in Europe


European Community


European Environmental Bureau


European Economic Community


European Investment Bank


Euro-Mediterranean Human Rights Network


Euro-Mediterranean Partnership


European Parliament


European Political Cooperation


European Union


Euro-Mediterranean Study Commission


Front Islamique du salut


Friends of the Earth


Former Yuglosav Republic of Macedonia


International Court of Justice


International Monetary Fund

Multicultural Agreement on Investment


Million ECUs


Measures d'ajustement


Mediterranean free trade area


Middle East Peace Process


Mediterranean Information Office


Mediterranean Non-member Countries


Mediterranean Partner Countries


North Atlantic Council


North Atlantic Free Trade Agreement


North Atlantic Treaty Organization


Non-governmental organization


Organization for Economic Co-operation and Development


Organization for Security and Co-operation in Europe


Partnership-building measures


Poland and Hungary Aid for the Reconstruction of the Economy


Arab Network for the Environment and Development


Regional Economic Development Working Group


Renovated Mediterranean Policy


Structural adjustment programmers'


Turkish Republic of Northern Cyprus


Union of the Arab Maghreb


United Nations


United Nations Educational, Scientific, and Cultural Organization


Western European Union


World Trade Organization


World Wildlife Fund (Worldwide Fund for Nature)

Executive Summary

Political economy is concerned with the nature and interaction of the political and economic aspects of social reality. Different approaches to political economy can be distinguished and categorized along several dimensions or criteria. The most important of these is the conceptualization of the relationship between politics and economy, more specifically 'whether or not they claim to depict a systematic relationship between' the two. While one of the central tenets of mainstream approaches to political economy is an ontological (and largely unquestioned) assumption that the 'state' and the 'market' are essentially separate spheres of social reality, critical approaches argue that they are systematically related and that the apparent separation posited and observed by mainstream political economy is itself the product of historical development. This critical perspective on the relationship between 'state' and 'market' does not necessarily imply an economic reductionist understanding, where politics is simply reduced to the effects of economic forces, although that position was dominant within Marxist political economy for many years. But it does suggest that major political developments cannot be explained without reference to economic forces.

A closely related issue is the stance adopted with regard to 'social reality' and its analysis and conceptualization in the social sciences. The distinction made by Robert Cox between problem-solving and critical theories is useful here and it is worth quoting him at length: 'Problem-solving theory, takes the world as it finds it, with the prevailing social and power relationships and the institutions into which they are organized, as the given framework for action'. Taking this view of the world makes it difficult to study fundamental transformations, especially when the nature of institutions and the relationship between economics and politics may be changing. But it also tends to limit problem-solving theories to explaining the functioning of existing systems and makes them less useful in raising questions about how they came into existence and is maintained or changing. These differences are of central importance to the conceptualization of the relationship between politics and economy. While mainstream political economy takes the separation of the economic and political spheres for granted, critical political economy asks how this separation came about, how it has been (re-)produced and by whom, what role it plays in modern capitalist democracies, and why it has become so widely accepted in the social sciences. Critical political economy is, for example, helpful in the analysis of the 'new regionalism' in Europe, where efforts to redefine the relationship between politics and the economy and to 'insulate substantially the new economic institutions from popular scrutiny or democratic accountability' have been important aspects of the move towards economic and monetary union.


Free trade has long been associated with the phenomenon of lassies faire and lassies passe. This implies to the liberal trading polices across the borders. The principal-agent model and the theory of delegation, which originated in the new economics of organization, have been increasingly applied in the study of the European Union (EU). This chapter critically examines these applications. It argues that the principal-agent model holds significant promise for understanding the complex relationships and interactions that characterize the Union, not least on account of its greater institutional sensitivity over traditional theories of integration. However, its potential has as yet not been fully realized. This is due partly to the prior theoretical commitments of the EU scholars, who have used these models, partly to misunderstandings of the complexity and implications of the approach.

The discussion below is divided into three parts. The first offers a brief overview of, and background to, the principal-agent model. The second discusses the promise that the model offers for understanding European integration and governance, then examines in detail its deployment by authors writing from four theoretical perspectives - liberal inter-governmentalism (LI), institutional inter- governmentalism (II), historical institutionalism supra-nationalism (HIS), and rational choice supra-nationalism (RCS). The final section discusses general weaknesses in how the principal-agent model has been applied to the EU and suggests future research possibilities (Posner, 1999, p. iii).

The Principal-Agent Model in Economics and Political Science

From its origins in the new economics of organization as a theoretical construct devised to examine relations within the firm the principal-agent model became the dominant framework for examining the difficulties that arise from contracting in any setting. Agency relationships are created when one party, the principal, enters into a contractual agreement with a second party, the agent, and delegates to the latter responsibility for carrying out a function or set of tasks on the principal's behalf. In the classic representation, the principal is the shareholder of a company that contracts an executive to manage the business on a day-to-day basis. However, the principal can be any individual or organization that delegates responsibility to another in order to economize on transactions costs, pursue goals that would otherwise be too costly, or secure expertise.

Difficulties arise on account of the asymmetric distribution of information that favors the agent, including adverse selection and moral hazard. The asymmetry of information can allow the agent to engage in opportunistic behavior - shirking - that is costly to the principal, but difficult to detect. The likelihood of shirking is increased by slippage, when the very structure of delegation 'provides incentives for the agent to behave in ways inimical to the preferences of the principal'. Assuring control and limiting shirking is the 'principal's problem'. The challenge is to find ways of ensuring perfect compliance, so that agents cannot exploit the costs of measuring their characteristics and performance to act contrary to the preferences of the principal. Economists have focused on incentive structures that discourage opportunistic behavior on the part of the agent. Contractual restrictions on the agent's operational purview or monitoring the agent are alternative possibilities, but can be costly. Their effectiveness is limited by the extent to which the agent's actions can be observed (Russell, 1967, p. 147).

The new economics of organization has been very influential in political science. Rational choice institutionalism, in particular, has drawn from its toolkit in its explanations of how institutions emerge and interact. Scholars of U.S. politics have used the principal-agent model to investigate the relationship between Congress and executive agencies, and the tasks performed by congressional committees. In international relations, delegation has been used to explain why sovereignty-conscious states create international organizations. The basic model has been used to assess the efficacy of mechanisms devised to ensure agent compliance, and extended, elaborated upon, and adapted to take account of cases where there are multiple principals.

Research Question

The objective of the research is to investigate various aspects of free trading policies in the global political economy, in particular the economic and industrial situation of Tunisia after the implementation of free…[continue]

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