Asian Development Bank’s Principal Agent Problem

Asian Development Bank’s Principal Agent Problem
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In economics, there is or occurs a problematic relationship known as the principal agent problem. This problem occurs “when a principal delegates an action to another individual (agent), but the principal does not have full information about how the agent will behave. Secondly, the interests of the principal diverge from that of the agent, meaning that the outcome is less desirable than the principal expects” ( While this problematic relationship has been observed more acutely in the corporate governance of economic activities like firms, it holds in other spheres and domains too, like contracts and contractual obligations. In Kashmir, the principal agent problem exists in multiple forms and has recently come to the fore after it came to light that a certain consultant hired by the Asian Development Bank(ADB) has been overpaid or has overcharged the said bank by crores and the work carried out by him has not been commensurate with his remuneration. This, if the definition of the Principal Agent employed here holds, is a classic example of the problem. The consequences of issues like this are wider and larger than the PS problem and the case in contention. The issue then needs to be dealt with seriousness and urgency. But, the question is, how? One answer that lends itself as a putative solution is that the individuals, to whom work or contracts are delegated be screened vigorously and they be awarded these consultancy contracts after due diligence. Second, instead of merely individuals, actually teams be employed for a given period. These ad hoc teams then need to be monitored vigorously by creating layers of accountability, both top down and bottoms up. There are a plethora of young, untainted youngsters with degrees of diplomas in project management who can be hired and to whom these contracts can be delegated to. The problem that would arise here would be that of inexperience. But, it is not an insuperable issue. In this day and age, these young and energetic consultants can be supervised, guided and monitored virtually. This approach can potentially work and is a win win for both the principle and the agent. The principle would be able to get a given project completed without undue hassles and corruption while the agent would not only get proportionate remuneration and also gain valuable experience. While these suggestions are not exhaustive , but these, if taken recourse to , and applied, would constitute a useful starting point for clean and able project management that obviated the principal agent problem to a large extent.

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