The principal-agent model arises when an individual or a
company is caught in the middle between two agents. This model works best when
the two agents have the same end goal in mind and share the same ideas about
what path will most likely bring that success. However, this is almost never
the case, and the individual is caught between wanting to please both agents
while also wanting the best outcome for him or herself. Ideally, the agent in
the middle is not looking to benefit themselves at the cost of those employing
him, but again this is rarely the case. Since I am currently unemployed, this
is not an issue I face in my everyday life. However, I believe there are many
examples of how we see the principal-agent model arise commonly in society.
A great example of how the principle-agent model acting as a
triangle in modern society comes from the 2016 World Champion Chicago Cubs. In
2011, Cubs management hired Theo Epstein as President of Baseball Operations,
and recently all his hard work paid off in the form of a championship. But
imagine for a minute that Epstein had failed. Epstein has to answer to two
different principals: the fans of the Cubs and the Rickets family who employ
him. As President of Baseball Operations, it is Epstein’s job to put the Cubs
in the best position to win. But this is where the principal-agent model comes
in. The Rickets family wants Epstein to succeed and put a winning team on the
field, but not necessarily in the most expensive way possible, as that money is
coming out of their pockets. The other agent, the Chicago fans, who were
desperate for a championship, wouldn’t care how much money Epstein spent on
players as long as wins were being accumulated. In this case, both the
principals want the same end result which is ideal, but they have different
ideas about what may be the best path to success. It was then Epstein’s job to balance
spending with the need to win, which he has done more than adequately. This
model could easily fall apart, however, because if say Epstein spent more than
any other team on players and the Cubs won the division but not the World
Series, he would likely be pleasing the fans because they technically have a
winning team, but his other principal, the Rickets family, would not see all
his spending as justified because no World Series was won.
The principal-agent model is a great way to study the
motives of people in their work. It reveals why people do what they do, and
whether they’re trying to serve one principal, both principals, or just
themselves. Therefore, more than anything, the model says a lot about an
agent’s morals. If one principal continues to get the short end of the stick,
this would be cause for that principal to investigate that agent and to maybe
seek out a different one. From my experience and especially when looking at
this sports example, in these cases the only way to find a resolution is to
fire the agent. This may be an isolated example though, as the demand on
general managers to win games for the franchise is so high. There is no way for
a general manager of a sports team to please one agent while ignoring the
other, but in other examples I suppose it would be possible this to happen.
It’s unfortunate that the turnover rate in this specific business is so high,
but unfortunately I do not see a way for those in sports business to please
only one principal and keep their job.
Your description in the first paragraph has the labels backward. There are two principals. The agent is caught between them. Also, in the first paragraph you have the correct word, principal. In the second paragraph you switch to principle, which is not right. I wonder why you did that.
ReplyDeleteGiven that you chose to write about baseball as an example, the Cubs in particular, I wonder if you are aware of Moneyball. The issues you talk about are far more prominent for small market teams. Kansas City is the most recent example. The Cubs are in the third biggest market in the U.S. and WGN is one of those TV channels that everyone gets. So while keeping costs down is always an issue, it is much less so for big market teams like the Cubs.
Let's try to push this a little more. My favorite team, the Yankees, had been going with a lot of (expensive) free agents who had much past success but were perhaps over the hill or if not that then still more injury prone. The Cubs had a lot of young players on their team, with a small number of veteran players mixed in. This looks like a good formula for success. But...
The way free agency works, very young players are not yet free agents. So they are comparatively inexpensive salary-wise. If they perform well, their market value will go quite high and to resign them as free agents will be much more expensive. A big question for Epstein and the Cubs is what to do at that point - keep the nucleus intact or let the expensive players go and bring in still more very young players. We are not there yet.
I do think Cubs fan loyalty is unquestioned, but apart from winning there are fan favorites that would make sense to keep on the team for that reason. Looking back at Cub history, Ernie Banks is in that category as was Ryne Sandberg. What about the current crop of young players. Who is in that category now? That, it seems to me, is a big part of what Epstein must decide.
Repeating is harder than winning it the first time, especially in this era of free agency. Let's see how they do next year.
I agree with you that the Cubs aren't the exact same team as the moneyball Oakland A's but just because they are a big market, they did not follow a Yankees like model. With only a few big name free agent signings the cubs have essentially played small ball in their front office. Over the past few years they have acquired draft picks and traded for key players like Jake Arrieta. However, all of their young players will need to eventually get a large salary and the cubs won't be able to afford all of them. This is why they have stock piled a plethora of young prospects that they can use as assets in the future on their own team or trade them away like they did to acquire Jake Arrieta and Chapman
DeleteJohn,
ReplyDeleteGreat post, I am a huge Cubs Fan myself. While I agree with your explanation of Theo, The Ricketts, and the Cubs fans worldwide --> I slightly have to side with Prof. Arvan on this one. The Cubs problem in years past wasn't that they had to balance money spent in order to compete (they are a huge market team) it was a complete lack of administrative leadership on every level. They were completely incompetent at scouting and developing players and that was that fault of every previous GMs decisions, not the money spent. Luckily Theo came in and actually had a vision on how to scout and develop amazing players while also being a savvy businessman and make trades/ free agent signings that eventually build the 2016 championship roster. Like I said your explanation for the model is correct, but maybe just not for the Cubs who have so much money and could more align with a team like Tampa Bay Rays who have a much smaller market to work with and therefore have to "play moneyball" and have a savvy GM who can navigate the money well.
John,
ReplyDeleteI really enjoyed reading your post as I am a huge Cub fan myself. Especially as you focused your post on Theo Epstein, of which I am very impressed with. I remember him form his Boston days and what he did with them. Now after completely transforming two "cursed" franchises, I believe he will go down in history as one of the best general managers in all of sports, not just baseball. In sports there are a lot of different things that must come together in order to achieve the desired outcome of winning. You could have a team of allstars but lose half of your games for a variety of other reasons. Coming into the 2015 season, I sat down and looked at what was going on with the Cubs. At that time I realized that Theo had done what every sport executive tries to do; He built the perfect team. In that regard he found success in being the agent to multiple pieces of the Cubs team.