The Principal Agent Dilemma and Donald Trump

The Principal Agent dilemma describes the problem when we hire someone else to do a job for us. Their interests are not the same as ours. We can attempt to mitigate the issue through structures that align our incentives.

This clip from Office Space explains it well.

Peter’s incentives are to not get fired. His goal is to clear that threshold with minimum effort. Obviously, his employer would prefer he work as hard as possible. And the Bobs propose a solution to the problem. Some sort of stock equity program where employees would share in the success of the company.

How does this apply to Donald Trump right now?

We the people “hired” Donald Trump to represent our interests. There are already plenty of ways in which he has chosen his own interests over the country’s. However, we are close to an election, so we would expect him to behave more in line with our interests in order to win the election.

Right now, Donald Trump is very likely to lose re-election. Further, it does not seem like just doing a better job would be enough to win. It also does not appear that he is capable of doing a better job in the way any of us would understand it. His political standing would clearly be better if he had handled COVID-19 competently, and, yet, here we are with over 100k dead and no end in sight.

Donald Trump probably needs something big to win. His situation is also binary. There is only winning and losing. Losing by a little or a lot is basically the same to him. As a result, he will be willing to take larger risks than he otherwise would have. More importantly, he will be willing to make riskier choices than we the people would like.

A coronavirus vaccine could be enough to save Trump politically. It would have to happen by October 2020 at the latest for it to help him, though. Let’s say there are two paths to a vaccine. The traditional path would guarantee us a vaccine in March of 2021. The aggressive path gives us a 5% chance at a vaccine in September 2020. However, if it fails, all of the effort would be wasted. As a result, it would delay a vaccine by an additional 6 months. It would be the equivalent of a Hail Mary.

Given those hypotheticals, we the people would choose the less aggressive path. However, Donald Trump would prefer the aggressive path. It gives him a chance, however small, of changing the race and improving his chance to be re-elected.

Beyond that, he has engaged in criminal behaviors, but being President has protected him from the consequences. He was an unindicted co-conspirator in Michael Cohen’s felony, though he has likely committed many other crimes. If he wins a 2nd term, he may be able to outlast the statute of limitations or even exert enough control over the government to make his problems go away. If he doesn’t win, he could face significant criminal charges. This raises the stakes for him, so that he should be willing to make very risky decisions if they hold any chance to improve his situation.

Thus, for the next 6 months, we will be represented by a President whose incentives are wildly different from ours. It’s a dangerous time.