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The Reform of Incentive Mechanism for Second Major Program: Based on the Principal-Agent Theory

Received: 24 October 2019     Published: 3 December 2019
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Abstract

Over the past three decades, many universities in China provide students with the Second Major program, aiming at cultivating interdisciplinary talents and meeting the undergraduates’ increasing demands for a wide variety of knowledge. In general, the Admissions Committee often attaches importance to the applicants’ previous academic records rather than their willingness to study during the process of selection, which tends to result in the adverse selection problem. Besides, as the Second Major education system fails to incorporate an appropriate incentive compatible mechanism, many enrolled students with low level of learning initiative would be prone to moral hazard problems, such as truancy, chronic absence and poor performance in class. In order to solve the above two kinds of problems and improve the quality of education, we first propose a novel pricing strategy bundling tuition fees and course quantities based on the principal-agent theory, which is designed to mitigate the adverse selection problem by identifying applicants’ private information (the level of their willingness to study) and enable the Admissions Committee to select those applicants with both strong academic ability and high learning willingness. Then we set up the incentive models for the full and limited liability scholarship systems respectively to address the moral hazard problems, and find that the infeasible full liability scholarship system can simultaneously optimize the utility of all participants, while the feasible limited liability scholarship system would only bring about the sub-optimal results.

Published in Education Journal (Volume 8, Issue 6)
DOI 10.11648/j.edu.20190806.24
Page(s) 332-337
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2019. Published by Science Publishing Group

Keywords

Incentive Mechanism, Second Major Program, Principal-Agent Theory, Adverse Selection, Moral Hazard

References
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[3] Holmstrom, B. & Milgrom, P. (1991), “Multitask principal-agent analyses: incentive contracts, asset ownership, and job design”, Journal of Law, Economics, & Organization, 7: 24-52.
[4] Sappington, D. E. M. (1991), “Incentives in principal-agent relationships”, Journal of Economic Perspectives, 5 (2): 45-66.
[5] Alchian, A. A & Demsetz, H. (1972), “Production, Information Costs, and Economic Organization”, American Economic Review, 62 (5): 777-795.
[6] Ross, S. A. (1973), “The economic theory of agency: The principal's problem”, American Economic Review, 63 (2): 134-139.
[7] Jensen, M. C. & Meckling, W. H. (1976), “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics, 3 (4): 305-360.
[8] Kadan, O., Reny, P. J., & Swinkels, J. M. (2017), “Existence of Optimal Mechanisms in Principal-Agent Problems”, Econometrica, 85 (3): 769-823.
[9] KAMALAN, A. (2018), “Supervisory Incentives within Contracts: A Principal-Supervisor-Agent Approach”, Journal of Finance, 6 (2): 58-63.
[10] Rud, O. A., Rabanal, J. P., & Horowitz, J. (2018), “Does Competition Aggravate Moral Hazard? A Multi-Principal-Agent experiment”, Journal of Financial Intermediation, 33: 115-121.
[11] Bendickson, J., Muldoon, J., Liguori, E. W., & Davis, P. E. (2016), “Agency Theory: Background and Epistemology”, Journal of Management History, 22 (4): 437-449.
[12] Rubin, J., & Sheremeta, R. (2015), “Principal–agent Settings with Random Shocks”, Management Science, 62 (4): 985-999.
[13] Maggetti, M., & Papadopoulos, Y. (2018), “The Principal–agent Framework and Independent Regulatory Agencies”, Political Studies Review, 16 (3): 172-183.
[14] Bosse, D. A., & Phillips, R. A. (2016), “Agency Theory and Bounded Self-interest”, Academy of Management Review, 41 (2): 276-297.
[15] Rutherford, A., & Meier, K. J. (2015), “Managerial Goals in a Performance-Driven System: Theory and Empirical Tests in Higher Education”, Public Administration, 93 (1): 17-33.
[16] Rabossi, M. (2017), “Agency Costs in Higher Education: Evaluating an Institution through a Comprehensive Framework”, Higher Education Policy, 30 (3): 319-339.
[17] Franco-Santos, M., Nalick, M., Rivera‐Torres, P., & Gomez-Mejia, L. (2017), “Governance and Well‐being in Academia: Negative Consequences of Applying an Agency Theory Logic in Higher Education”, British Journal of Management, 28 (4): 711-730.
[18] Li, Y. (2015), “A Discussion on the Dual Multi-Layer Principal-Agent Relationships in Education”, Journal of the Chinese Society of Education, 6: 63-68.
[19] Guo, K. & X. Gu (2016), “Why Repeated Bans on Teacher’s Private Tutoring Always Fail: A Principal-agent Analysis of the Government’s Regulatory Dilemma”, Education & Economy, 2: 53-60+67.
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  • APA Style

    Guangtao Xia, Wangyin Hu, Hao Wang. (2019). The Reform of Incentive Mechanism for Second Major Program: Based on the Principal-Agent Theory. Education Journal, 8(6), 332-337. https://doi.org/10.11648/j.edu.20190806.24

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    ACS Style

    Guangtao Xia; Wangyin Hu; Hao Wang. The Reform of Incentive Mechanism for Second Major Program: Based on the Principal-Agent Theory. Educ. J. 2019, 8(6), 332-337. doi: 10.11648/j.edu.20190806.24

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    AMA Style

    Guangtao Xia, Wangyin Hu, Hao Wang. The Reform of Incentive Mechanism for Second Major Program: Based on the Principal-Agent Theory. Educ J. 2019;8(6):332-337. doi: 10.11648/j.edu.20190806.24

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  • @article{10.11648/j.edu.20190806.24,
      author = {Guangtao Xia and Wangyin Hu and Hao Wang},
      title = {The Reform of Incentive Mechanism for Second Major Program: Based on the Principal-Agent Theory},
      journal = {Education Journal},
      volume = {8},
      number = {6},
      pages = {332-337},
      doi = {10.11648/j.edu.20190806.24},
      url = {https://doi.org/10.11648/j.edu.20190806.24},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.edu.20190806.24},
      abstract = {Over the past three decades, many universities in China provide students with the Second Major program, aiming at cultivating interdisciplinary talents and meeting the undergraduates’ increasing demands for a wide variety of knowledge. In general, the Admissions Committee often attaches importance to the applicants’ previous academic records rather than their willingness to study during the process of selection, which tends to result in the adverse selection problem. Besides, as the Second Major education system fails to incorporate an appropriate incentive compatible mechanism, many enrolled students with low level of learning initiative would be prone to moral hazard problems, such as truancy, chronic absence and poor performance in class. In order to solve the above two kinds of problems and improve the quality of education, we first propose a novel pricing strategy bundling tuition fees and course quantities based on the principal-agent theory, which is designed to mitigate the adverse selection problem by identifying applicants’ private information (the level of their willingness to study) and enable the Admissions Committee to select those applicants with both strong academic ability and high learning willingness. Then we set up the incentive models for the full and limited liability scholarship systems respectively to address the moral hazard problems, and find that the infeasible full liability scholarship system can simultaneously optimize the utility of all participants, while the feasible limited liability scholarship system would only bring about the sub-optimal results.},
     year = {2019}
    }
    

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    T1  - The Reform of Incentive Mechanism for Second Major Program: Based on the Principal-Agent Theory
    AU  - Guangtao Xia
    AU  - Wangyin Hu
    AU  - Hao Wang
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    DO  - 10.11648/j.edu.20190806.24
    T2  - Education Journal
    JF  - Education Journal
    JO  - Education Journal
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    SN  - 2327-2619
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    AB  - Over the past three decades, many universities in China provide students with the Second Major program, aiming at cultivating interdisciplinary talents and meeting the undergraduates’ increasing demands for a wide variety of knowledge. In general, the Admissions Committee often attaches importance to the applicants’ previous academic records rather than their willingness to study during the process of selection, which tends to result in the adverse selection problem. Besides, as the Second Major education system fails to incorporate an appropriate incentive compatible mechanism, many enrolled students with low level of learning initiative would be prone to moral hazard problems, such as truancy, chronic absence and poor performance in class. In order to solve the above two kinds of problems and improve the quality of education, we first propose a novel pricing strategy bundling tuition fees and course quantities based on the principal-agent theory, which is designed to mitigate the adverse selection problem by identifying applicants’ private information (the level of their willingness to study) and enable the Admissions Committee to select those applicants with both strong academic ability and high learning willingness. Then we set up the incentive models for the full and limited liability scholarship systems respectively to address the moral hazard problems, and find that the infeasible full liability scholarship system can simultaneously optimize the utility of all participants, while the feasible limited liability scholarship system would only bring about the sub-optimal results.
    VL  - 8
    IS  - 6
    ER  - 

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Author Information
  • PBC School of Finance, Tsinghua University, Beijing, P. R. China

  • School of Social Sciences, Tsinghua University, Beijing, P. R. China

  • School of Economics and Management, Tsinghua University, Beijing, P. R. China

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