Principal-Agent Problems in the Private Security Industry: Critical Perspectives on the Use of Agency Theory in Modelling the Behaviour of Private Security Companies in Contemporary Post-Conflict Scenarios.

The literature on security privatization is overwhelmingly critical of any use of private security companies (PSCs) by western governments in post-conflict reconstruction environments (see for example Singer 2003). Due to their organizational form as private, profit-making entities, PSCs have greater motivation and more opportunity to make financial profit at the expense of their contractual partners and with possibly dire consequences for the success of the wider mission context in which they operate. Elsewhere, I have shown that this model of PSC behaviour is problematic, both theoretically and, probably more importantly, empirically (Drutschmann 2007). Contrary to the widespread consensus in the literature on security privatization, the large scale use of PSCs in, to a large extent, mission critical roles did not end in the predicted fiasco. Instead, the available evidence indicates that PSCs conducted themselves much more reliable than expected. In an effort to explain why the prevalent conceptualization of PSC behaviour is not supported by the empirical evidence, this paper will take a look at its theoretical foundation, specifically on the way in which agency theory is used to understand the relationship between the contracting state (principal) and PSCs (agent). In its first part, the paper will show that the current application of agency theory is not only overly simplistic, but that, as a result, important aspects of the theory are neglected and misunderstood. In its second part, the paper will take a look at how economic theory, from which agency theory is derived, discusses and deals with principal-agent relationships and the problems associated with them. The aim of this second part will be twofold. On the one hand, it will attempt to show that agency theory, despite its flawed current application, holds the potential of making a significant contribution to the understanding of the contractual relationship between states and PSCs. On the other hand, it will determine how and to what extent theoretical concepts that economists use to understand and solve principal agent problems are applicable to the private security industry. Theoretically, a focus will be on the field of economic sociology, which has greatly improved the understanding of economic processes in general and of agency related problems in particular in the last two decades. In its third and final part, the paper provides a broader outlook on the influence and contribution economic theory can make to the study of security privatization. Firstly, it will provide a brief overview of the few occasions when economic theory has been contributed to the discussion on security privatization. Secondly, it will address the question why economic theory, despite its obvious applicability, so far has only played a minor role in the study of private security companies and, finally, it will provide an outlook as to how economic concepts can be usefully integrated into the existing discussion on security privatization. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]