Dealing With an Auto Mechanic and the Principal-Agent Problem
Every Tuesday is a Game Theory article at Mind Your Decisions.
On a recent lazy Sunday, I planned to get the oil in my car changed. I called a nearby store to check their availability. The salesperson was glad to help me, and he even told me there was a $10 off coupon on the website.
I thanked him, went online, and tried to print the coupon. To my displeasure, I was out of ink.
It wasn’t convenient to replace the ink. In thinking of a solution, I noticed that the coupon didn’t have a barcode. It instead had a code corresponding to the promotion. I suspected that I didn’t actually need to print it. I could just tell them the code.
When I called to confirm, the salesperson responded that he needed the coupon. I asked him why I couldn’t just tell him the code. He concluded it wasn’t his job to figure that out. I was immediately transferred to a manager.
The shop must have been busy because he was in no mood to do me favors. “I can’t accept the code. I need the printed coupon so I can attach it to the bill. That’s our policy.”
Even when I persisted, the manager basically told me he couldn’t help out. It’s the old excuse, “It’s not my job.”
It actually was his job to help me. But I suspected that he didn’t see it that way because he was caught up in a game of his own.
The Principal-Agent Problem
The principal-agent problem occurs whenever you hire someone and you cannot fully monitor their work effort. It also happens when you cannot monitor your boss, who is tempted to make decisions out of self-interest.
For instance, let’s say you hire a teenager to hand out samples of your product at the grocery store. You pay an hourly rate of $10. You instruct your new employee to sample judiciously and try to encourage more sales of the product. You explain that you will be out of town, but you’ll review performance later.
Unless you hire an amazing teenager, you’re in for trouble. The teenager will realize you cannot monitor performance; your new worker will be tempted to work out of self-interest rather than company interest. Perhaps your worker will take long breaks, sample generously to physically attractive customers, or leave early.
The worst part is that your new employee will relish small excuses that get in the way of getting the job done. If the weather will be bad, or customers will be rowdy, your new employee will get discouraged quickly and shirk on the job.
The problem is that your employee knows more than you. Any time one person knows more than the other, you’re in a situation of asymmetric information (compared to symmetric information where all parties have equal information).
Instead of getting performance from the new hire, you’ll end up paying for someone who works out of self-interest. You are the principal (P), and your employee is called the agent (A). Because the principal cannot monitor the agent, the agent can secretly work out of self-interest by slacking off.
(The problem is not just agents slacking off, but also executives seeking financial gain illegally at the expense of employees. An example is the recent stock option backdating scandal).
The problem is nicely represented on Wikipedia graphically:
The problem comes up a lot in politics and economics, and usually the goal is to try to align the incentives of the principal and the agent.
A classic illustration of the problem is lower-level employees telling customers “It’s not my job” when it often is there job. The employees are trying to get out of work. Often, they get paid the same hourly rate whether they sell goods or not.
By saying “It’s not my job,” the agents are getting a larger payoff by strategically limiting their options.
In terms of the diagram, the agent is using any small excuse as a way to remove the “performs” arrow. This allows the agent to work for self-interest and slack off:
It’s technically the principal’s job to figure out incentives and monitor the agent.
But what if you are the customer? You’re trying to get the agent to work so that you can shop peacefully. What can you do to get the agent to cooperate?
How I Solved my Problem
I suspected the manager’s excuse that he needed a printed coupon was flimsy. I thought he might budge, so I pressed him some more.
He replied, “I’m sorry. I need that coupon to give you the discount. That’s the corporate policy. They’ve recently been coming down hard on us for handing out these deals. You need to give me the coupon when you bring your car in. I can’t accept it tomorrow, or two days from now. I need it now.”
It sounded a lot to me like he was working out of self-interest instead of doing his job. Would the owners of the business give up on a legitimate sale because of a coupon policy?
I reiterated the coupon and the deal, and mentioned that it’s really obvious that I wasn’t trying to cheat them. I felt like I was being penalized for something stupid his particular branch was doing.
He was limiting his options to get out of work. I figured to get him to do work, I’d have to do the opposite. So I came up with a new strategy: expand his options.
If he could see that it would be easy to help me, then perhaps I could get him to do his job. He would not be able to rely on small excuses like corporate policy. He’d really have to lie to himself that it’s not his job.
I replied, “I’m really in a bind. It’s inconvenient for me to print this coupon. I have choices to go elsewhere, and will do so if you cannot help me. I trusted you guys for changing my tires and oil before. Is there a way you could help me?”
I continued, “Do you have a printer I could use? Could I print the coupon in your office? How can you help me get the discount?”
Here’s what I hoped would happen:
I was greeted with silence, but it appeared that something I said clicked with him. He reviewed my car record on his computer, and immediately changed the tone of his voice. “You haven’t come to us very many times, but I see your problem. I’ll figure some thing out and take care of you. Just remember to plan better in the future, because corporate is really coming down on us.”
Success!
I didn’t have to mention to him that they were one of the few stores around that was actually open, and that I was committed to going to them regardless. We cooperated, and it was a nice feeling on that lazy Sunday.
A Skeptic’s Appendix
Now, a couple weeks later, I reflect upon the incident and I wonder if he was really acting out his incentives from the principal-agent problem. Was he really serving his own motives, or was it a lapse of judgment? Did I really add extra options to him and change his mind?
The part of me trained in classical economics says yes. Well, even if he was not consciously doing these things, he acted as if he were doing these calculations. It goes back to the analogy that Milton Friedman suggested. He said you should judge models based on predictions, and not whether the assumptions were realistic. For instance, you could accurately model the shots of billiard players using differential equations. Expert pool players don’t actually do these calculations, but they act as if they were. Some times I think this analogy is great; and other times I’m more skeptical that we’re modeling people with unrealistic assumptions.
So here’s one alternative explanation of why I was successful, not using game theory. Perhaps what my request really did was remind both of us to act like decent human beings and stop playing games.
Perhaps it’s time to blow the model up entirely.
21 Responses to “Dealing With an Auto Mechanic and the Principal-Agent Problem”
Which economic theory factors in demanding jerks?
By Phun Yet on Feb 5, 2008
A couple of things can be read between the lines.
Printing the coupon is a must because of audit and compliance issues. The principal and his auditors are going to demand the coupon as evidence to confirm that the discount was given as evidence of that piece of paper. Of course an agent could game the system by offering to split the discount with the customer. That is why principal have unique bar codes in coupons that prevent agents from gaming the system.
That would not be a good strategy either for the manager as he would be considered dishonest and why would you want to go to a dishonest car repair shop? Requesting a printer to print the coupon was a nice end game strategy for both parties as
1.) The customer gets the discount.
2.) The managers gets the evidence.
3.) He gets the revenue for his principal who in turn is going to make an economic decision based on revenue to continue to retain the agent and the agent probably gets a cut of the revenue as an incentive.
Here is another things to know about auto repair. Saturdays are the worst time to go for these things. Ask your friendly agent (car repair manager) if there are days in the week where you can get a discount on some schedule maintenance as in a way he is trying to manage his inventory of skilled labor with the demand for services. By scheduling this ahead of time and beging flexible on schedule gets you a bargaining advantage. I have had some good discount on car repair labor by adopting this strategy.
To quote Alan Greenspan in the Book Maestro,”For a long time I was a believer in the invisible hand of Adam Smith and self interest because it felt right. What Ayn Rand convinced me with her discussions was that (enlightened or being smart about) self interest is not only right, it is also moral.”.
By Mahesh on Feb 5, 2008
I think you’re missing the point of the coupons (as was everyone else in the story). Coupons are a means of offering multiple price points to multiple customers. Coupons are a “hoop” to jump through for the price conscious, while if you have enough money not to bother with them, you’ll let yourself get soaked for the extra 10 bucks.
In your story, the first person you talked to shouldn’t have told you about the coupon, and the manager should have held firm.
What this points out, of course, is that neither one of those employees has any incentive for how profitable the business is. As you point out, you would have gone anyway, so they lost out on $10 for the principal. They may have gained some customer loyalty, but I doubt they got $10 worth, given how much you’re complaining about the fact that you had to work to get your discount
By Danny on Feb 5, 2008
Danny
Nice point on the multiple price points. The principal rarely incents agents on profitability at least in the “single owner entrepreneur” case and to some extent partnerships. The principal does not want the agent to know how much money he is making because if the agent figures it out and if there is low barrier to entry, the agent can become a competing principal. Which is why a lot of times, sales people are incented on revenue and not on profit because all these price points have been decided keeping certain margin goals in mind. So in reality, I doubt if this principal cared about profitability which was baked into the revenue and multiple price point structure.
By Mahesh on Feb 5, 2008
Profitability, revenue, doesn’t matter. In either case, the agents in essence offered you a no-brainer way to decrease it. Which defeats the point of the coupons.
By Danny on Feb 5, 2008
@Danny & Mahesh - Those are some interesting points you both bring up, but I think what’s amusing about Presh’s story is how the first person brings up the coupon (not part of their job) but won’t help him acquire the coupon.
What I find especially amusing in all this is how the self-interest plays out. If someone is paid hourly, they don’t have any set goals, its probably better for them to do random tasks like this, since it cuts into their tedium.
An example of this seems to happen with stock-people at various stores, I can’t remember one of them not not being helpful in finding an item, usually even bringing me to the exact location or sometimes searching the store with me. I bet helping someone find something is a lot more fun than stacking cans up on a shelf or folding a bunch of clothes.
Now, this only works if the work they ignore can carry over indefinably or if failing to complete tasks does not negatively impact their job.
In Presh’s example, it could be the case that the salesperson was using time which could be spent selling cars, meaning by printing out the coupon for Presh, they could miss out on a potential sale…then it makes a lot more sense as to why they stopped being helpful.
Also, with the manager, if the had a stack of paperwork which needed to be finished by the end of the day, and they needed to stay until it was done, clearly taking the extra time to print out a coupon is going to be curbed.
So…I think the model still holds, we just need to be more creative as to what the self-interest could be
By RohoMech on Feb 5, 2008
@Mahesh: Great analysis. I didn’t think of the auditing implications. I always get humbled by smart readers like you
Also, good point on planning ahead about when to get a repair. I’ll keep that in mind.
@Danny: Yeah, it is surprising the first person told me about the coupon. Good point–it does defeat coupon theory of multiple price points. But to counter, I have already given the store a lot more work on my car since I trust them, so I think the bet paid off on that manager’s part
@RohoMech: Interesting take. As you reason out, the model gets complicated when we add in more “realistic” assumptions about daily life, like being annoyed about doing paperwork. That’s why I felt like blowing the model up in retrospect.
By Presh Talwalkar on Feb 5, 2008
@Presh: Hmmm, my point was more about the inputs to the model, but I guess you’re alluding to something like, we need a model to give us reasonable inputs into this model etc…hence complicating things and perhaps making it much less useful.
By RohoMech on Feb 6, 2008
Presh-
A side issue related to your post - if you had a Kodak printer that used low priced ink, would you have been out of ink? Or better yet, would you have been more likely to have a replacement cartridge handy so you could have printed out the coupon at home?
I work for Kodak and believe that our low priced ink helps change printing behavior. People are “stocking” up on ink more than they would have with more expensive ink. In turn, there are fewer instances when they want to print but have no ink on hand.
There are tons of great economic issues involved with Kodak’s new printers and ink. For instance, one is that although our ink is low priced, we didn’t lower the amount of ink inside. However people are skeptical because that is what our competitors have done.
Anyway I hope you got more ink so you can print coupons at your will.
Enjoy the blog!
Thanks.
-Ben
By Ben on Feb 7, 2008
@Ben: To answer your question, my printer was a free one I got with my laptop. So, you probably know which company that is…I’m sure the cartridge was half-filled, and they are expensive.
So I am now considering a new printer, and that’s why I didn’t just go and buy replacement ink.
I appreciate your suggestion, and I’ll be sure to consider Kodak
By Presh Talwalkar on Feb 7, 2008
Are free things really free? When you buy electronics, vendors will thrown in free stuff along with it. Are these really free or are you getting ripped off? Sounds like a nice topic of discussion.
By Mahesh on Feb 8, 2008
In my experience on “free” items related to electronics, the answer is sometimes. I’ve seen cases where you add something to allow one retail to be able to differentiate their product vs. another retailer (in electronics the product is typically the same - just change the model number and a few specs). In this case, the customer is probably getting something “free”.
In other cases, you add items to try to hold the price. At the end of the day, most consumers would rather not have anything added to keep the cost low. I guess this gets really close to a “bundling” discussion.
By Ben on Feb 8, 2008
@Mahesh: Good comeback. They are not really free. You either have to send in rebates, or the price is somehow included in the package. I more accurately should have said, it was part of the package I bought.
@Ben: Yes, bundling is the right word to describe it!
By Presh Talwalkar on Feb 8, 2008
Or in the case of printers, they really are free, since they’re just a vehicle for selling ink. When I bought a laptop a few years ago, I was unable to get them NOT to ship the printer. And then it sat around for a few years gathering dust, since I couldn’t find anyone to donate to. But their strategy finally paid off when my other printer died, since I had a spare on hand. But to spite them, I buy 3rd party ink cartridges. Hah! Take that!
As if they care..
By Danny on Feb 8, 2008
@Danny: Now that you mention it, I also collected a free printer and let it sit around for a year. Funny that you could not opt out, and it’s great that you bought 3rd party ink to show them who’s boss
By Presh Talwalkar on Feb 8, 2008
Given the employees’ incentives, why on earth did you decide to entrust your car to them? Those places regularly butcher cars. And convenient Sunday service isn’t a good reason.
By R on Feb 11, 2008
R: Good question. My friend recommended them to me, and he says they do good work. The incentive problem extends to practically all shops, too, including dealerships. But yes, I worry about the incentives.
By Presh Talwalkar on Feb 11, 2008
Your blog is awesome. I love your fresh insight and the obvious intelligence of your readers.
And the discussion, that rules too.
By Joon on Feb 14, 2008
I agree.
@Joon: Any coincidence that you posted that today?
By Danny on Feb 14, 2008
@Joon and Danny: Thanks for the kind yet self-promoting words
By Presh Talwalkar on Feb 14, 2008
@Presh: You caught me! I’m not too worried about that unless you start doing some game-theory analysis on me.
By Danny on Feb 14, 2008