Topic 3: Modes of Learning
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Learning Objectives
At the end of this topic, you should be able to answer these questions:
- What are the different modes of learning available to bridge SNIC & ‘broken agency’ problem in pension governance?
- What mode of learning is best suited to bridge SNIC & ‘broken agency’?
- What are focal points and ‘fire alarms’?
- What are the design implications of a mixed mode of learning in pension governance?
In this topic we will discuss the mode of learning that is best suited for the governance process. In the previous topic we analyzed the contracting environment between principals and their agents in pension management. We learned that incomplete contracts between principals and agents are strongly non-contractible. The principals do not have observable and verifiable information to evaluate actions and outcomes of the agents. The strongly non-contractible incomplete contracts (SNIC) are embedded in a principal agent relationship characterized heterogeneous expectations and by ‘broken agency’. In such a contracting environment the governance must be a process that seeks to reduce opportunism as a behaviour by identifying an endogenous learning mechanism that actively considers the attributes of the social and cultural norms (the prior conditioning) and promotes the feeling for the entity. The identification of such a learning mechanism is the goal of the discussion in this topic.
Modes of Learning
Under SNIC, as in pension management, the pension subscribers or principals and their agents or the different functionaries in the pension management industry are in a strategically interdependent relationship. Moulin (1995) identifies three modes of strategic co-operation or learning in strategically interdependent relationships. These modes of co-operation are:
- The Direct Agreement Mode;
- The Justice Mode; and
- The Decentralized Mode
Each of the three modes of co-operation incorporates a learning mechanism. Which one of the three learning mechanisms is appropriate in the context SNIC & ‘broken agency’, to reduce opportunistic behaviour in the relationship between principals and agents in pension management? This we will evaluate this next.
The Direct Agreement Mode
The direct agreement mode is independent of any institutional context as there is face-to-face transaction. Given SNICs between plan subscribers and financial service providers; heterogeneity of expectations and ‘broken agency’, this mode of learning is unsuitable for pension governance as it will require that the pension subscribers (principals) replicate all management functions by directly negotiating every stage of the pension management process.
The advisor-client relationship in individual pension plans, such as the Registered Retirement Savings Plans (RRSP) in Canada, is the closest example we have of learning in direct agreement mode. However, being free of the institutional context, this mode does not inform us about information access, qual