Don’t Take the Auditor to the Strip Club

A few months ago, I wrote that “one of the main problems in finance is the principal-agent problem, and one of the main forms that it takes is steak dinners.” You know the deal. You want something from a company or government agency, but you negotiate with that company or agency in the form of a person, some particular executive or official who decides whether to give you the thing. The company or agency has purposes of its own, but the person is a person, and he enjoys a steak dinner. If you discuss your issue with him over a nice steak dinner that you pay for, he might be grateful to you personally and give you what you want. Ordinarily I use feminine pronouns for generic hypothetical people but here, for reasons that will soon become apparent, our hypothetical agent is a man.

When I wrote about this, I was describing the modern, and perhaps somewhat euphemistic, form of the problem. Within living memory, I could easily have written that “one of the main problems in finance is the principal-agent problem, and one of the main forms that it takes is visits to the strip club.” You know the deal! The agent whose favor you want might like steak, but he might also like lap dances, particularly after his fourth martini at the steakhouse. If you buy him a steak, he might be vaguely grateful to you. But if you buy him a lap dance, he will be grateful to you and also afraid of you. You are not merely friendly business acquaintances; you are seedy co-conspirators. You have seen him do stuff that he would not want his boss or his wife to know about. He’d better give you that contract.