Wednesday, June 1, 2011

A solution to the Govt.'s Agency problem

Almost all govts. in the world are not working in the most efficient way they possibly can. One of the major reasons is the internal looting of the govt by way of corruption (lobbyists influencing policies in a way that the govt and its people suffer), internal fighting among many others. All govt jobs have fixed pay and perks. The motivation to not harm the organisation they are working for is not much (excepting Patriotism and Morality). 

One of the possible solutions for solving the agency problem of the govt officials can be possibly found in the concept of capital markets. (Related post disecting the problem: Capital Markets are inherently more efficient and way faster in doing things.
One solution I am proposing is to have the concept of stock markets with the very govt. itself being treated as a company. Lets take the one market which is most open to accepting free market concept - USA. So USA could be a stock which is freely traded by the citizens in the country just like its sovereign treasury securities.

Source of capital:
Now, lets assume 5 or 10% of all the govt officials salaries are given in the form of the employee stock options with the stock of USA.

Concept of Returns:
As a stock price indicates the problems of the entity and the future potential of the entity, investors will make money if they work in such a way that the country's future is better. They would like to see higher prices of all their 5-10% of their salaries in pensions to not greatly affected. This has the potential to stop the govt. official to work harder, not do things that will harm the country. Similar to how a employee stock option feels for an employee. A sense of ownership is created. These people will be willing to work harder and make better policies as they now have a stake. Once a critical mass is attained in any organisation, the peer pressure will make the others also work more efficiently and effectively.

Valuation of Stock:
This is the most tricky part. Unlike companies where future earnings is the most important parameter to be considered (if today's company abides by rules and destroys the environment, so be it. The investors dont care). But, in case of the country as a whole, there are many subjective parameters to be considered. National Security, Environment,  Sustainability of natural resources, mortality rate, quality of the govt officials making decisions, etc
Maybe an earnings index can be calculated based on the other indices. Take for example the Transparency Index the topic it relates to which is corruption and ease of doing business. Say, Corruption is given a weightage in the earnings as 10% and Ease of doing business as 5%. Next, if the country comes in the top 5 countries where corruption is least, it is given a full score of 10 points= full weightage; Top 10, 9 points; top 20, 7 points; so on and so forth.
So this will enable the country to come to a number based on the current ratings of Indices. As valuation is always subjective and depends on the uncertain future, different investors will predict different ratings and better/worse situation of the country on various parameters. This will make the people govt understand what is it that people want. If they dont do as per the wants of all their citizens, they get a lesser share of their pay/pension. If they manage to reduce crime, increase efficiency, etc, people will be happier and the govt officials will get more money. This also prevents petty politics in the country, which is nothing but a drain on national resources.

Foreign entities as investors:
Once foreign entities buys these stocks, there is an opportunity for the country to get someone who is interested in the well being of the country and get more favourable responses to various initiatives.

Concept of Holding company:
Since USA is made of various states and states resources/financials actually have a major role to play in the countries well being, state govts. should also give their employees the shares of their states.

Today, the govt. officials can play petty politics and get all their money in cash in priority. If the people can have a indirect say in what they think about the decision everyday instead of once in 5/6 years, I am sure better wiser decisions will be made by the govt. officials.

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