Management of Agency Problem through Performance Contracts – Case of Public Sector Enterprises

Abstract

The current endeavor attempts to understand how the management of public enterprises could be incentivized to work by putting their maximum effort in the direction of the objectives set forth by the government as the owner. By bringing in principal-agent theory into context, we see how performance contracts (here MoU contracts between PSEs and administrative ministries co-ordinated by Department of Public 56 Enterprises) works to incentivize the agents (management of PSEs) to work in line with the objectives of the principal (Government). The broad agenda is to see 1. How to ensure alignment of goals of the agent through performance contract? 2. How incentive based performance contracts could be improved in operations and design?