Dealing With an Auto Mechanic and the Principal-Agent Problem

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.