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principal-agent model in real life


The standard principal-agent model involves only two parties, one principal, and one agent. The agent is helping the principal make decisions and actions based on the relatively abundant and professional information it possesses. In real life, however, there are some times one agent working for more than one principal, trying to help both of them better off at the same time. Sometimes due to the incapabilities of communication, work done by agent is not as efficient as it should be with respect to both principals. Furthermore, sometimes the agent utilizes such ineffective communication between the two principals to take advantage of them without neither of them knowing. 

The tourism in China can be described as a three-party principal-agent model. The two principals are the local souvenir stores and the tourists, whereas the agent is the tourist agents of the tourism companies. The tourist agents are supposed to do two major jobs for the tourists and the local souvenir stores. Firstly, they should provide background information or history about the local attractions, and usually those are given by the tour guides of the tourist agent company. Second, they should help local souvenir stores to sell their products to the tourists. If those two things are done appropriately, all parties should be happy and satisfied. The two principals, tourists and the local souvenir stores, are satisfied with the service they receive from the tourist agent, the thorough background introduction and the decent amount of goods the stores sold. However, most tourist agents in China take advantage of the tourists by selling the products of those souvenir stores with ridiculously high prices. After selling those products to the tourists, the local stores and the agents “divide the spoils”. Moreover, the tourists are forced to spend money in those local stores, otherwise the tourist agents will be really mad at them, sometimes even will curse the tourists. 

To clarify, the official souvenir stores won’t involve in those contracts with the tourist agents, their prices of the goods are reasonable. It is the unofficial, or private, or even fake souvenir stores that have such deals with the agents. 

This inauspicious situation is created because of the inability of the two principals to communicate with each other. If the two principals are able to acknowledge the real deal, or if the two principals can be out of the control of the agent, the consequence might be more auspicious. In other words, the tourists will save lots of their money from buying local merchandise at a ridiculously high price; the local stores might be able to sell goods to more people, since the price of the goods are more reasonable and affordable for the majority to purchase. 

I actually don’t know any potential solutions toward this inauspicious situation happening in China, since this phenomenon is so ubiquitous and rampant. It is impossible to solve the issue of the entire tourism industry within a limited amount of effort and time. However, I know for sure that from tourists’ side, we should travel on our own, or choose reliable sources to purchase tour plans (packages) instead of purchasing and attending tourist service from seemingly cheap tour plans (because usually cheap tour plans are not actually cheap, they force you to purchase their expensive products). So that eventually (hopefully), those rampant, inefficient principal-agent combination will diminish or even disappear.

Comments

  1. Professor ArvanNovember 23, 2019 at 1:14 PM

    I haven't done much traveling the last few years, so my questions may be a bit out of date, but they amount to this. Are there stores that are frequented by both local Chinese people and by tourists? Or are the stores entirely separate this way so tourists shop only where other tourists shop?

    In the first instance, tourists might get some assurance that the prices are reasonable because local people shop there too. In the second instance, there is no such information to say whether the merchandise is priced reasonably or not.

    There is then the issue of how the merchandise is brought home. If it's small and not bulky, it can be placed in the luggage. But if it is big and cumbersome, it probably has to be shipped separately. I wonder if that is another area where the tourists can be ripped off.

    I was in Denmark back in the early 1980s and I bought some sweaters (that I still have) and shipped to the U.S. I also bought some silverware, that I hand carried on the flight home.

    I do want to note one other thing here. It's not clear from your story if the tourists eventually learned they paid too much for the stuff they bought. If they never realize it, is there actually any harm done? If they do realize it, does it have a negative impact on tourism in the future? Those seem to be the questions to consider.

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    Replies
    1. Alice RivlinNovember 30, 2019 at 11:55 AM

      Hello Professor Arvan,

      Those stores are open only to tourists. Actually those tourists join a traveling group, usually about twenty to thirty people, with one or two tour guide, commuting to anywhere by a rented shuttle/bus. The driver and the tour guides will tell you when to get off the bus. "Here is the attraction" / "here is the store, everyone HAVE TO get off the bus and go shopping". It is the case that once those tourists start their trip within the traveling group, their freedom is limited. Even if they realize this trip plan is a "phony", it's too late, at least for this specific trip.

      Luckily, there are increasing volume of articles and journals reporting and portraying such phenomenon, so that this prevailing occurrence is happening less and less frequently. The awareness of the population is raising.

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