Despite its bilateral nature, the principal-agent model
works as a triangle model in real life because the agent is dealing with two
different principals rather than just one. As the agent is trying to please two
principals, it entails different conflicts when the two principals are in a disagreement.
This principal-agent model is very similar to the time when my dad used to work
as a property manager for my aunt’s apartment.
My aunt owned an apartment complex with six units that was not
under any management company. So when she had to move to South Korea, she
appointed my dad as the property manager since our family already lived in the
building. My dad filled out various paper work that gave him authority to handle
all the business regarding the building. Since my dad was tending to only one
building, this wasn’t his primary job, and rather than getting paid a salary,
we got a certain amount of our rent waived.
As a property manager, my dad worked as a middleman between
my aunt (the landlord) and the tenant. He took over all the roles that my aunt
would’ve done as a landlord as he collected rent, signed the lease, paid
expenses and taxes for the building, find tenants, deal with tenant disputes,
and handled maintenance requests. While working with different tenants and
building maintenance issues, my dad would call my aunt about once a month to update
her. Since our family already lived in the building, my dad had a pretty good
relationship with most of the tenants. This meant that he was very willing to accommodate
to the needs of the tenants and tried to have their best interest in mind. He
was very quick to respond to any maintenance requests or disputes among
tenants.
From what I remember, there was always two things that I
would overhear my dad and aunt argue about: the rent and new tenants. There
were many times when my aunt would want to increase the rent after the lease
was over, but the tenant that was staying would want the rent to stay the same.
My dad was in a dilemma because he had to follow the orders from the landlord
(my aunt), but he also wanted the tenant to stay so that he didn’t have to go
through the process of looking for a new tenant. Looking for a new tenant was
also an issue at times because my aunt would want all the units rented out at
all times and was less strict with who she was willing to rent out the
apartment to. However, my dad was more cautious and mindful to the other
tenants that were living in the building. He wanted to make sure that the
people living in this building wouldn’t make too much noise and not get into
any possible disputes with the other tenants. In order to get to know the
potential tenants, he would ask how big the family is, if they have any pets,
and three contacts for reference.
As much as my dad wanted to tend to some of the needs of the
tenants, the ultimate decision came from my aunt. Therefore, the best he could
do to alleviate the conflict was to have a conference call meeting with the
tenant and my aunt. The three of them (mostly tenant and landlord) would try to
negotiate a resolution. Many times, my aunt was adamant about her decisions and
ultimate decision was usually in her favor.
Since my aunt is so removed from the situation, perhaps my
dad could’ve done a better job of informing my aunt of the situation. Maybe if
she had a better idea of where he was coming from, she could’ve been more
willing to compromise with the tenants.
This was an interesting perspective to read about the triangle form of the principal agent model. In my opinion, this is even more difficult than a work relationship, because one expects their home to be comfortable and without conflict. Your dad was in a difficult position because making the home environment work for a large group of people is a challenge. I am wondering if this conflict was made easier or more difficult given the family relationship between your dad and aunt. Would a random landlord have been more or less willing to give your dad this control?
ReplyDeleteYou are now the third student to write about agency relationships within the family. I'd prefer not to consider family matters, but at least yours really was a business proposition.
ReplyDeletePart of the issue with rent increases, which you might consider is whether the there are costs that the owner bears and if those costs have increased. This includes property taxes and might also include some utilities. If maintenance was outsourced that costs matters too. In general rent should be tied somehow to the cost of keeping up the place, though demand matters too. It is much easier to raise rent when it is hard to find an apartment. Conversely, it harder when there are vacancies at neighboring places.
As I said, negotiation within the family is a different matter because non-business issues can come to bear. But in this case, it seems to me, that if your dad did an accounting of the various costs, that would have been the most straightforward way to address the matter.
I agree that negotiation within the family brought a lot non-business issues to the conflicts that they had. As much as my dad and aunt tried to separate business and family, conflict within their relationship was inevitable when they had disputes about business regarding the apartment.
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ReplyDeleteIn a way, your aunt had a situation of moral hazard with your father. She usually made the decision as to whether the rent should be raised and tenants should be switched out or not, but your father would be the one actually taking on the risks regarding the process of finding a new tenant and dealing with that new tenant's possible behavior issues. Then again, there might also be a moral hazard if your father was the one making the decisions with your aunt being the one ultimately collecting the rent. I suppose that a way to solve this moral hazard situation would have been for your aunt to sell the building to your father, but this may not have been practical depending on your father's financial situation. Exploring your situation from the perspective of moral hazard and risk might make for a good reflection at some point.
ReplyDeleteDid your aunt and your father's principal-agent relationship significantly affect other parts of their relationship? Another thing you might talk about in the future is whether the cost of living was increasing in your area or not, as cost of living increases can make a building more expensive to maintain due to higher maintenance fees, property taxes, etc. Besides that, I was wondering whether you knew for a fact that the rent increase was actually the only reason the tenants were leaving or not. If the cost of living in your area happened to be increasing, other factors such as increasing food and gas prices could have been another major factor in the tenants' departure, in which case the tenants would have likely eventually left no matter what happened to the price of the rent.
Reading about the situation between your aunt and dad is a new way for me to look at the subject. I am wondering in how far the family relationship had a role, because I can imagine that your dad wouldn't disagree with a higher rent if his boss wasn't your aunt.
ReplyDeleteSomething different from the principal-agent theory in your blog, is the fact that your dad was living between his 'customers'. I don't know if developing an emotional relation with the customers is good for running a business, since I think you should be able to work objectively. Therefore, I wonder if your dad still would disagree with the higher rents if he lived somewhere else.