Economic development is seen as a business and
government partnership. The author’s Lombard and Morris (2012) analyze how the
principle-agent theory can foster public-private partnerships and privatization
to foster growth. They use a specific case example to help highlight their
overall concept of cross-pollination. It is this cross-pollination that should
help develop other projects within the area.
Local entities seek to increase their economic
activity as well as the potential spill over benefits of additional employment.
They look for and solicit businesses to move into their areas and develop
productive capacity. In many cases using approaches such as an advantageous
business environment and lower taxes helps nudge businesses to consider local investment.
The authors use Virginia Beach, Virginia as their
case study. The historically suburban city was struggling to create a vibrant
business downtown business district. As the project started as a single
government entity and a single private entity it was a simplistic way of
studying the factors of development. The principle-agent theory appeared to be
the most appropriate scientific lens.
In the development of a public-private partnership
the values and goals of the public become more important than individual goals.
The principle-agent theory implies that one entity wishes for the task to be
completed and the other agree to complete the task (Eisenhardt, 1989).That
process can exist between government and company, doctor and patient, or
contractor and subcontractor.
When there is a partnership between government and
business it is through an alignment of goals. Governments do not necessarily
seek a profit but do seek to minimize costs and increase effectiveness through privatization.
Companies that seek profits do so within the defined prices set by the
government. A general bidding process can be used to determine interested
parties.
In the case of Virginia Beach the merging of two
entities found that there was no core business district. Local decision-makers
rezoned the downtown area and used an effective slogan such as “live, work,
play” to sum up the genre of their location. Furthermore, they developed the
downtown district by having the principle (i.e. government) using an agent
(private business) to develop available parking other projects. The bidding
process helps to ensure that competent companies compete to reduce the overall
price.
A number of key concepts fold into each other. Using
a marketing slogan that sums up the goals of the area may be effective in
pitching to future investors. The development of a downtown district helps in
sparking increased investment and interrelated projects of growth. More
importantly, government can encourage investments in particular areas by being
both data rich and offer appropriate guidance in areas of necessary
improvement. The principle-agent theory need not apply only to government
funded construction but could also apply to potential promotion of areas where
outside investment will likely be successful within the economic hub.
Eisenhardt,
K.M. (1989). Agency theory: An assessment and review. Academy of Management
Review, 14(1), 57–74.
Lombard, J. & Morris, J. (2012). Using
privatization theory to analyze economic development projects. Public Performance & Management Review,
35 (4).
