The Influence of Direct Democracy on Agency Costs: Lessons from Corporate Governance

Abstract

The administration of large public corporations and the administration of countries require frequent decision-making on complex problems. Big public companies and countries have a large number of shareholders and citizens respectively. This creates in shareholders and citizens alike an incentive to shirk the responsibility of gathering and analyzing the information required to make good decisions for two reasons. First, shareholders and citizens alike have reason to believe that there are numerous others who will take on their responsibilities if they fail to fulfil them; and second, because they would bear all the costs of making informed decisions but receive only a small share of the benefits. A large number of time sensitive decisions requiring complex information need to be made by companies and countries on a regular basis. This heavy requirement makes it very unlikely that sufficient numbers of shareholders or citizens will collectively inform themselves and effectively coordinate their actions in order to manage the regular affairs of a company or a country respectively. Excessive collective action problems, therefore, make direct decision-making by shareholders and citizens unworkable as a mechanism for making the large majority of such decisions.