Dr. Jeff Sheldon discusses various topics from a LSE public policy analysis course: institutional solutions

Introduction

Between 31 January and 16 April 2024 I took a ten week, 80+ hours graded course from the London School of Economics and Political science (LSE) in public policy analysis. In this series, presented in the order of the ten LSE course modules, I offer up selections of my writings from across the course that include topics in economics, institutions, policy, statistics, policy evaluation, and politics, etc. Most are an answer to a prompt or question (provided if applicable), and vary between 250 and 800 words in length, short but hopefully insightful. You might not agree or agree only in part with my answers or assessments so feel free to engage me in dialogue, it will be most welcome. Likewise, if you’d like more context don’t hesitate to ask. Enjoy!

Assessing the effectiveness of institutional solutions

Question 1: Talia owns the largest producer of ice cream in Easteros (a fictional country created by LSE). She currently relies on several small manufacturers to produce the packaging for her products. She has contracts with each of her manufacturers and has quarterly meetings with them to discuss business for the next quarter. Other than this interaction, she has little oversight over their work. Over the last year, Talia’s business has boomed, and she is wondering whether she should begin packaging her product in-house. In this scenario I provide a brief recommendation to Talia, highlighting the costs and benefits of vertical versus horizontal integration.

?Answer 1: “In terms of transaction costs, are you satisfied with your current producers - quality of packaging, extent to which they fulfill contractual obligations in meeting your needs, certainty about their ongoing capacity to produce within cost-structures specified in their contracts, and frequency of interactions and communication with them? If yes in that you’re satisfied with the current horizontal integration structure then costs of changing either producers or moving to a vertically integrated decentralized model in which you do your own packaging would likely be greater than benefits that might accrue. If you’re dissatisfied with any aspects of current packaging production, given your business is generating more income you likely have discretionary funds available to invest in either of two strategies. First, you could explore alternative producers who, according to my mate Williamson (1985), have the same asset specificity in their ability to produce packaging you need. The likely costs are the amount of time and resources you’ll need to expend in finding other producers, and the uncertainty that those found will be able to produce packaging in sufficient quantity and quality at a price-point with which you’re satisfied. The benefits might include: finding producers who produce packaging at a lower marginal cost but of equally high or better quality over the long term, and more frequent interactions and communication for improved quality control monitoring. Second, you could, as noted, explore and potentially develop your own packaging capacity. There would likely be legal costs associated with breaking existing contracts, research and development costs, start-up costs (e.g., equipment, staff training, etc.), ice cream manufacturing might suffer taking away from your bottom line, and you’d need to consider holding at least a few of your existing packaging producer contracts until such time as you were at capacity. The benefits include greater overall organizational efficiency because you’d be better positioned to control costs, external packaging producers wouldn’t be able to take advantage of your infrequent interactions with them, you’d be able to closely monitor quality control, and you’d be better positioned to deal with uncertainty and volatility in supply chains. You’ve got clear options.”

Reference?

Williamson, O. (1985). The mechanisms of governance. Oxford University Press.

Question 2: Many countries have foreign aid programmes that provide financial or other resource assistance during humanitarian crises. The Parliament of Easteros has voted that an annual sum of ￡30 million should be allocated to global humanitarian crisis responses. The humanitarian crisis in the Democratic Republic of Congo (DRC) will be the focus of donations for the next three years. In this scenario I had to imagine I was the minister of international development of Easteros. After the vote in Parliament, I was allocated ￡30 million per year to spend on assisting vulnerable groups in the DRC for a three-year period through one of three possible strategies. The strategy I chose is setting up a new governmental agency focused on humanitarian crises. The mandate of the agency is to use the annual ￡30 million to identify and work directly with vulnerable groups in the DRC. Where it is impossible to intervene directly, the agency is tasked with identifying partner organisations in the region and then monitoring and enforcing the responsible use of Easteros’ humanitarian assistance. In my response I:

1.????? Highlight the principal–agent relationship in the strategy;

2.????? Mention one or two institutional features that you would consider putting in place in order to minimise the agency costs and maximise the benefits of delegation; and

3.????? Apply the theory learnt in this module, such as shirking, slippage, lock-in, externalities, enforcement, monitoring, and institutional incentives.

Answer 2: According to UNOCHA (2023), ongoing armed conflict in eastern DRC has created a humanitarian crisis impacting over a quarter of the country’s population. Specifically, conflict has caused widespread internal displacement, epidemics, and malnutrition each of which exacerbated by environmental factors worsening living conditions and eroding access to humanitarian aid. Humanitarian response, according to UNOCHA (2023) includes access to nutritional and medical services, emergency water, and sanitation and hygiene services especially in the most vulnerable communities. While this is UNOCHA’s proposed response, according to Development Initiatives (2018) humanitarian assistance can reach people in need via multiple channels and transaction chains. This doesn’t preclude alternatives such as setting up a new agency to either work directly with vulnerable DRC groups or partner - through contracts - with eastern DRC NGOs using a form of un-earmarked funds which offer greater flexibility in anticipating and responding to rapidly changing needs (Development Initiatives, 2018); contracts with NGOs would, by necessity, include monitoring indicators and other enforcement mechanisms. As Development Initiatives points out, in 2016 local NGOs directly received just 0.4% of all international humanitarian assistance so are an underutilized resource. Although not a signatory to the Grand Bargain, Easteros is committed to making progress in improving the efficiency and effectiveness of humanitarian assistance with at least 25% of its humanitarian funding going to local and national responders as directly as possible (Development Initiatives (2018).

That said, because funds come from Easteros’ Parliament it is a principal and the new agency its agent. It also appears Parliament has created the agency as a bureaucracy with a mandate which makes it a principal in its own right such that it can delegate humanitarian efforts through contracts with NGOs and hiring local humanitarian personnel as agents who will provide direct humanitarian aid and assistance to those most in need. In sum, Parliament is a principal, the new agency is both agent and principal, NGOs are agents, and local hires are, likewise, agents.???????????????????????????????????????????

According to Hawkins et al. (2006) Parliament (as a de facto third party) or the new agency can offer a credible commitment to enforcing the formal rules (although new, the agency has a Parliamentary mandate) to which NGOs agreed to adhere through their contracts so they neither succumb to opportunism (i.e., slippage) by using funds for anything other than what was intended nor defect from their agreed upon responsibilities (i.e., shirking). Ideally, the agency could eliminate shirking and slippage by vertically integrating NGOs over the life of funding to maximize efficiencies given potentially high contract monitoring and enforcement costs. From Hawkins et al’s. (2006) perspective, if NGOs are horizontally integrated monitoring and enforcement would prevent shirking by ensuing NGOs fulfill their contractual agreements in providing humanitarian aid to those in need, monitored perhaps by amount and type of aid rendered. It would also prevent slippage by keeping NGOs focused on the intended beneficiaries of humanitarian aid rather than on themselves. Those hired to provide direct humanitarian are monitored through the agency’s human resource’s policy and procedural mechanisms.

References

Development Initiatives. 2018. Global humanitarian assistance report. Available: https://devinit.org/resources/global-humanitarian-assistance-report-2018/

Hawkins, D., Lake, D.A., Nielson, D.L. & Tierney, M.J. 2006. Delegation under anarchy: states, international organizations, and principal-agent theory. In Delegation and agency in international organizations. D. Hawkins, D.A. Lake, D.L. Nielson & M.J. Tierney, Eds. Cambridge: Cambridge University Press: 3-38. DOI: 10.1017/CBO9780511491368.002.

UNOCHA. 2023.West and Central Africa: Democratic Republic of the Congo. Available: https://www.unocha.org/democratic-republic-congo ??????

Thanks for reading. Please feel to ask questions or offer comments below. Next up: statistical uncertainty.