Prof Robert Elgie's Inaugural Lecture

Bringing the People Back In: The European Central Bank and the Democratic Deficit
Professor Robert Elgie

1. The basic assumptions of principal-agent theory

Principal-agent theory is derived from work initially carried out in the field of economics (Ross, 1973). In particular, it is drawn from the economics of business and the theory of the firm. It addresses two basic problems with which students of business and, certainly, the business people present in the audience will be very familiar. The first is the situation where an employer cannot necessarily know which candidate is best qualified for a job. Given that all candidates will try to sell themselves equally well, the employer may find it difficult to determine which applicant will bring the best return. The second is the situation where an employer cannot know how well a person is working once they have been employed. The employer simply cannot observe everything that the employee does. The employee may be lazy. S/he may be making a personal rather than a work-related telephone call and so on. What principal-agent theory can do is to indicate how we can ensure that only well qualified candidates will apply for a post and how, once employed, there will be no need for the employer to monitor the employee's every move to see whether s/he is working in the interests of the firm.

In this lecture, I am only going to focus on this second problem. How can we ensure that the employee is working in the way that the employer wants? In terms of politics, the focus is not so much on the employer and the employee but on politicians and bureaucrats (Moe, 1985). How can directly elected and accountable politicians ensure that unelected and unaccountable bureaucrats in government agencies are doing what they want? In this context, the existing literature has suggested that politicians can use two types of controls to make sure that this is the case (McCubbins, 1985). The first can be put in place when the agency is being set up and include defining the range of the agency's powers, the duties of its office-holders and so forth. The second are ongoing and include procedures such as special enquiries, budgetary controls, the power to dismiss agency officials and so on. All told, the principal-agent approach is a useful way of studying the issue of whether bureaucrats are responsive to the demands of directly elected representatives. It is also useful for showing the ways in which institutions can be designed so as to ensure that bureaucrats do what politicians require. I will now look at these issues in the context of the ECB.

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1. The basic assumptions of principal-agent theory
2. Supporters and critics of the ECB
3. The reform of the ECB
In Conclusion