Standard Principal-Agent Model in Real World

When I was an intern in Radisson Plaza Hotel as a front desk trainee, I got a chance to work with Concierge Department. The main duty of Concierge Department is to make sure the customers in the hotel have a great time during their stay. All the people work in the department are very familiar with customer services in the city and tourist destinations. During the day and night, one of the most popular services is getting taxi for customers. One day when I was working with Concierge Department, I asked the manager of the department Tom that what strategies the department usually use to get taxi more efficiently, especially in traffic rush hours. Tom explained to me that there is a popular app on the market that called “Find a Taxi Driver.” Basically, the app helps hotels and other tourist destination services to find taxi drivers 24 hours a day and match by the preference of location. It is like a “Yelp,” but in the purpose of finding taxi drivers. I asked Tom that how reliable the department could trust an app like that. He said, the process is that Tom just to hit the button of “request” in the app with his phone, and if the taxi driver is able to come here for the service, then the driver will call back to the phone number that put request. There are a lot of taxi drivers who worked for a particular taxi company, but each service they get match with a customer through the company has to pay back to the company. In another word, the benefits of the service will be deducted if they get customers through the company. However, the taxi company provides drivers’ maintenance to the car, licenses and their salaries, so drivers are trapped with the company. Meanwhile, these taxi drivers want to make some extra money without giving back to their company, and that is why they enjoy using the app, since there is no contract restrictions through the app, and they can get services whenever the market needs them. All those reasons prove that why the app is reliable for people who work for the Concierge Department in Hotels. Plus, there is more than one app in the market, which serves the same group of people.

In this case, taxi drivers are equal to the agent in the standard principal-agent model. The customers/clients of taxi drivers are supposed to come from either company customer request, or through some drop-in services on the street. In fact, for the purpose of taxi drivers’ personal benefit, they minimize the clients of these two categories, but they try to maximize their personal benefits through taking more customers from the free market (such as through the app).

The firm in this model is of course the company of those taxi drivers. The firm would like to get more clients through providing more efficient services to customers, and through the money they gain from each service of each driver. There are a lot of costs included here. The company has to pay for the maintenance of each car, the insurance of both cars and taxi drivers; however, the firm is going to spend more it is supposed to be, because the time those taxi drivers devote into the company is much less than what their time of shift, so the company should not pay for the costs which enables taxi drivers to get more personal benefits.

On the other hand, the firm is not able to expand their service because even they use better strategies to expand on their business, the customers can’t be matched very efficiently with taxi drivers, since so many of them are focused on their own business. The firm will lose some old customers if the situation is worse.

From the perspective of the firm, taxi drivers act as taking advantage of opportunism and they serve clients instead of serve the firm itself, which is the taxi company. From the perspective of Concierge Department in hotel, they are serving both clients, which is customers in hotel, and their firm, which is the hotel. It is surprising to find out later that the reason the hotel will rely on using apps to serve for customers have another reason. Each hotel hires some drivers and maintains partnership with some contractor. The drivers hired by the hotel can serve both clients, which is customers of the hotel, and the firm, which is anyone in the hotel. Most of the drivers are more willing to serve more to the firm, instead of customers, because they will have personal benefits, such as financial benefits, like tips, and non-financial benefits, such as potential opportunities of promotion. Those drivers who have contracts with the company satisfy the triangle situation too.