Trimarchi, M. (Michele)

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48 Principal–agent analysisMichele TrimarchiThe contractual network in the arts sectorVarious flows of exchange occur in the arts sector. Some of them are mon-etary, some real, a few are mixed, and many are quite difficult to measure.This is due both to the relevance of metaeconomic aspects (aesthetic, cul-tural, informational and so on) in the determination of their value, and tothe need to be based upon subjective evaluations whose reliability is notnecessarily influenced by experience, education or training.Exchanges in the arts sector form a complex network that can be inter-preted as a combination of different principal–agent relationships. Creativeartists exchange their works with producers and dealers, they exchangethese art objects and activities with single purchasers or large audiences,central and local governments exchange grants or in-kind services withcreators (seldom), producers (normally) and sellers (frequently), privatecorporations exchange funds with artists and institutions, individualdonors exchange their contributions with theatres and museums.Tracking the flows that constitute a whole exchange route is importantin order to interpret the outcome of each production as resulting from thecombination of contractual power of each agent and of the system ofincentives (both legislative and conventional) exerting an impact upon theirstrategies and choices.Frameworks of exchange flows can take a recurring form in each sub-sector of the wider arts system. For example, common agency is typical ofthe performing arts market, in which the agent who sells live performancesto the audience receives funds from two principals, the public sector givinggrants of various forms, and the private sector giving sponsorships anddonations. More complex is the framework of exchange flows in the visualarts sector, where artist, dealer, collector, critic and expert contribute todetermine the value of some painting through a system of cross-evaluationand certification.Each exchange occurring between agents in the arts sector is normallycharacterized by difference and conflict of goals. Goals are often deter-mined in a generic way, such as diffusion of culture, artistic education ofthe new generations, preservation of cultural heritage and protection oflocal/national repertoire in the performing arts. Nevertheless, they canprove reciprocally conflicting: in many cases there is a trade-off between373preservation of and access to heritage, between innovation and access in theperforming arts, between the appreciation of regular consumers and theexpectations of occasional ones.The distribution of information among agentsHeterogeneity of the relevant information, and its different level of objec-tivity, makes it the fundamental factor in conditioning the relationshipsbetween principals and agents in the arts sector. This depends upon variouselements. First, there is a problem of certification of authenticity, whichappears to be quite strong in the visual arts, although it is not irrelevant inthe performing arts. Second, evaluation of quality – which is a multidimen-sional factor covering technical, aesthetic, cultural and social aspects – canprove quite controversial: evaluations of the same arts product can differstrongly from each other or appear incompatible with each other, accord-ing to the prevailing goal or group of goals taken into account.Third, consumer choice is based upon largely insufficient information:household production implies originality and uniqueness in each bundle ofgoods and services created by consumers, therefore ex ante information onquality and likely appreciation is almost impossible to attain, and ex postinformation is subject to a high degree of variability according to the dimen-sions of the informational stock previously accumulated by each consumer.Agents endowed with private information find it convenient to produceself-assessment of the relevant aspects such as quality of art products. Awide proportion of the value relevant in each exchange is usually generatedby information created, processed and diffused by the agent (artist,museum curator, theatre director and so on). Being related to metaeco-nomic aspects and subjective assessments, such information is not easilymonitored by the principal, who finds it difficult to transform it into objec-tive data.The problems of adverse selection and moral hazard generated by asym-metrical distribution of information are partially faced thanks to a systemof third party assessment of quality and other relevant characteristics ofeach arts product. Experts and critics produce a great deal of informationabout authenticity, quality and reliability of paintings, monuments, operas,plays and concerts, as well as the different forms of reproduction (records,pictures, books, videos and so on) whose complex and indefinite set pro-vides art consumers with additional information able to increase the levelof utility derived from direct consumption.Information and evaluations coming from these third parties can be var-iously reliable, according to the different degree of substantial indepen-dence enjoyed by critics and experts in relation to the main exchange flow.In fact, they are often former artists or producers, therefore their judgement374 A handbook of cultural economicsis likely influenced by past experience, with a high degree of subjectivity dueto the past active involvement in the economic life of the art sector.Moreover, given the relevance of their evaluations for the determinationof the economic value of art products, collusion between agents andcritics/experts can occur, strengthening agents’ contractual power againstprincipals, and introducing a further bias in the outcome of such complexexchanges.In some exchanges, such as those occurring between the public sectorand theatres or museums, opinion polls can also exert some influence uponprincipals’ choices; on the other hand, they appear to provide agents withuseful information if they intend to tune their own strategies and decisionsto market trends.Objectives, strategies and constraintsAs we noted before, the strategic choices adopted by both principals andagents depend upon their goals and orientation. Statutes, constitutions andmission statements usually contain long and heterogeneous lists of objec-tives. These refer to various aspects of art production, and are charac-terized by an inevitably low degree of precision. This extends to thedescription of tools and actions to which each principal or agent formallycommits in order to pursue his goals. In this respect, strong and sound prin-ciples often support weak and uncertain strategies.While single goals can conflict with each other within the strategy of eachsingle agent, his main orientation appears to be crucial in determiningthe likely outcome of each principal–agent exchange. The heterogeneousnature of activities, the range of material and financial dimensions, thedifferent extent of regional competence and other factors generate a varietyof institutional structures in the arts sector.From a juridical perspective, organizational forms can arise from variouscauses; they normally share the non-profit constraint, but can adopt theformal label of foundations, institutions or corporations, with a series ofspecifications and definitions (such as the newly born ‘participation foun-dation’ and ‘cultural society’ that enrich the Italian institutional land-scape).In order for their organizational orientation to be identified, the formallabel does not necessarily prove useful, though a few characteristics can beanalysed, such as the goals of price policy, the selection of inputs or thelength and breadth of product life. In the case of art producers, orientationnormally lies between the extremes of altruistic mission and revenue max-imization; a role is played by the proportion of utility derived by ‘immate-rial’ satisfaction, that is, utility related to the activity per se rather than toits monetary or material implications and effects.Principal–agent analysis 375In this regard, public institutions belonging to central and local govern-ment can be either oriented towards social goals such as the diffusion ofthe arts and culture or equality of access to the arts, on the one hand, ortowards typically bureaucratic goals such as consensus or rents (or somemix of both) on the other. For their part, private companies give funds tothe arts either in search for a distinguished reputation or – at the oppositeextreme – in order to diffuse their brand name through indirect publicity.There are cases in which the network of exchanges among the variousagents operating in the arts sector is more complex, and in which agentsof an exchange act as principals in another one, forming a sort of princi-pal–agent chain (as in the visual arts market); this makes the analysis of thewhole picture more difficult owing to the reciprocal impact exerted by theactual orientation of each agent.Also limiting our view to the simple case of a theatre or a museum, weoften face a common agency relationship, in which two principals givefunds to the arts institution (their common agent) in exchange for activitieswhose real nature and cultural value are completely known and evaluatedby the agent who receives the funds. The agent has therefore the possibilityto provide each of his principals with a false report about the goals actu-ally pursued (and the impact actually exerted). The choice actually to hidesome information from one or both principals depends upon how oneparty’s orientation combines with the others’.If the agent is revenue-oriented and the principals respectively pursuesocial goals (public sector) and reputation (private sector), there is the strong-est incentive for the agent to cheat, overstating the characteristics of hissupply which appear to be consistent with these generical and unmeasurablegoals. The most efficient response on the part of each principal is then toreplace monetary grants with in-kind subsidies: since monitoring of outputappears to be ineffective, the stage of control is ‘shifted back’ to inputs.This can contribute to the selection of mission-oriented producers whoare specifically interested, not in receiving grants, but in having a realopportunity to produce, since in-kind subsidies actually reduce their pro-duction costs.The existing framework of incentivesAn adequate system of incentives can substantially reduce – if not offset –the advantages currently enjoyed by cultural institutions in this complexprincipal–agent network. Unlike the case in manufacturing, incentives inthe arts sector cannot focus upon the price level or other monetary param-eters, also owing to the controversial measurability of value, and to the exis-tence of many (often infinite) alternative combinations of inputs, in orderto produce the artistic outcome.376 A handbook of cultural economicsIncentives appear to be weak in most (national and local) cultural poli-cies throughout the world. This is certainly due to bureaucratic resistance,and to the evident convenience for the art institutions to be included on alist of recipients, which in some way guarantees the reception of publicgrants year by year. But a stronger reason for this lack of effective incen-tives is the perception that any mechanism activating monitoring and theconsequential sanction risks impinging upon creative, artistic or culturalfreedom. Such a perception is shared by both art institutions and publicregulators, and assisted by a very strong and explicit moral sanction.A closer look at art production should make it clear that cultural choicesand managerial strategies can be separately considered, analysed and eval-uated. Of course there may be a ‘grey area’ in between, but certainly manydecisions and actions taken by art institutions can be the object of moni-toring and evaluation, according to the prevailing goals of the principal.In fact, while the choice of inputs in a performance or in an exhibitionare certainly related to artistic and cultural choices – and therefore respondto subjective and ‘untouchable’ criteria – there are many other aspects ofart production that can be measured through rather precise parameters: thediffusion in a certain area or the length of production, the policy aimed atguaranteeing equality of access and its outcomes, the educational impact,and the variety and quality of informational side-products are all parts ofart production whose monitoring does not exert any negative impact uponthe artistic and cultural choices.The level and composition of grants can therefore be tailored to the leveland composition of art production according to a specified hierarchy ofgoals and performance indicators. In such a way public grants couldabandon the uncomfortable role of financial lifebelt, becoming instead theexplicit reward for the attainment of specific goals.An effective system of incentives could finally move art production fromthe false market of grant maximization to its proper market, in whichvarious and heterogeneous principals ‘buy’ different parts (or effects) of theagent’s effort, each according to his goals, values and orientation; thiswould strengthen the importance of consumer choice and expectations,and re-equilibrate the contractual power of principals and agents.See also:Chapter 49: Public choice; Chapter 52: Regulation.BibliographyLaffont, J.-J. and J. Tirole (1993), A Theory of Incentives in Procurement and Regulation,Boston, MA: MIT Press.Peacock, A. and M. Ricketts (1991), Government and Industry, London: Putnam.Principal–agent analysis 377Throsby, C.D. (1983), ‘Perception of quality in demand for the theatre’, Journal of CulturalEconomics, 14, 65–82.Trimarchi, M. (1993), Economia e Cultura. Organizzazione e Finanziamento delle IstituzioniCulturali, Milan: Angeli.Trimarchi, M. (1998), ‘Giochi, dilemmi e incentivi nel settore teatrale’, in W. Santagata (ed.),Economia dell’Arte. Istituzioni e Mercati dell’Arte e della Cultura, Turin: UTET, pp.229–53.Trimarchi, M. (2001), ‘Incentive Failure and the Market for Information Goods’, in M.Marrelli and G. Pignataro (eds), Public Decision-Making Processes and Asymmetry ofInformation, Dordrecht: Kluwer, pp.189–202.378 A handbook of cultural economics

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