Agency Costs and Geopolitics: Rethinking Power, Incentives, and Control in MENA

When Michael Jensen and William Meckling introduced their seminal agency theory in 1976, their focus was corporate governance: how principals (owners) align the interests of agents (managers) who act on their behalf. Yet this framework, and its concepts of monitoring, bonding, moral hazard, adverse selection, and residual losses, extends far beyond the boardroom. Nowhere is this more apparent than in the complex geopolitical landscapes of the Middle East and North Africa (MENA).

Agency Theory in Geopolitics: Beyond Boardrooms

At its core, agency theory highlights the costs incurred when agents pursue their own goals rather than those of principals. These agency costs include:

• Monitoring costs: Ensuring agent compliance.
• Bonding costs: Guarantees by agents to reassure principals.
• Residual losses: Inefficiencies that remain despite monitoring and bonding.

In MENA geopolitics, where states, proxies, and militias navigate overlapping interests, these concepts reveal hidden dynamics shaping power.

Proxies and the Problem of Divergent Interests

Consider Iran’s regional strategy. Tehran acts as a principal supporting agents such as Hezbollah, Iraqi Shia militias, and the Houthis. These groups align with Iran’s broad goal of countering US and Israeli influence, yet each has distinct local agendas:

• Hezbollah prioritises Lebanese politics and its patronage networks.
• Iraqi militias pursue economic rackets and internal rivalries.
• The Houthis combine tribal interests with religious identity politics.

Iran’s agency costs here include:

• Monitoring costs: Directing, funding, and managing proxy operations.
• Bonding costs: Ideological indoctrination, shared religious narratives, and economic support to retain loyalty.
• Residual losses: Actions by proxies that harm Iranian strategic credibility or escalate beyond its intended deterrence posture.

Adverse Selection: Choosing the Wrong Agents

Agency theory warns of adverse selection, when principals select agents with hidden characteristics undermining objectives. In Syria, Western states funded so-called “moderate rebels” only to discover that many harboured radical Islamist ideologies or quickly defected to extremist factions. The initial inability to distinguish reliable partners from opportunistic actors led to strategic failure, moral hazard, and reputational blowback.

Multiple Principal Problem: Conflicting Agendas

The multiple principal problem arises when an agent answers to multiple patrons with divergent goals. Iraqi militias often navigate Iranian directives, local community expectations, and internal Shia clerical influences, creating conflicting loyalties and paralysed decision-making. Similarly, Gulf states balance US security guarantees with expanding ties to China, generating divergent expectations and strategic friction.

Reverse Agency: When Agents Capture Principals

Agency relationships can invert. Agents may become powerful enough to constrain or manipulate principals, a form of reverse agency or principal capture. Hezbollah, initially an Iranian proxy, now shapes Iran’s regional strategy as much as it executes it, given its entrenched domestic legitimacy, regional operational expertise, and partial financial independence. Within states, security apparatuses – Egypt’s military or Algeria’s DRS – often act as agents of national stability yet become de facto principals, dictating policy to nominal civilian leaders.

Bonding Costs and Incentive Alignment

While monitoring costs focus on surveillance and enforcement, bonding costs are agents’ own efforts to assure principals of their loyalty. Gulf elites pledge public loyalty to rulers; proxies issue ideological commitments to patrons; foreign aid recipients implement token policy reforms. Yet these bonding efforts are rarely sufficient to eliminate agency costs in geopolitics.

Soft Power as an Alignment Mechanism

Agency theory often emphasises material incentives, but soft power, cultural affinity, and shared ideology can reduce agency costs by aligning agent preferences with principal goals:

• Iran’s links to Hezbollah are reinforced by religious identity, reducing defection risks.
• US–Israel relations leverage shared liberal democratic narratives alongside military aid.
• Saudi Vision 2030 frames economic reform as patriotic duty, aligning elite buy-in with national goals.

Residual Losses: The Inevitable Gap

Despite best efforts, residual losses remain. US security assistance to Egypt fails to produce governance reform; Iranian proxies engage in corruption; Saudi military intervention in Yemen drags on with unintended humanitarian fallout. Perfect alignment of agent action with principal objectives is a mirage.

Practical Policy Implications

Understanding agency theory in MENA geopolitics leads to sober strategic insights:

1. Design mixed incentive structures – combine material rewards, ideological narratives, and reputational stakes.
2. Anticipate moral hazard and adverse selection – avoid assuming proxies or allies share your goals simply because they accept your resources.
3. Monitor dynamic agency costs – relationships evolve; yesterday’s compliant agent may become tomorrow’s spoiler.
4. Account for reverse agency risks – powerful agents can capture and constrain principals.
5. Embrace humility in strategy – agency costs are intrinsic to delegation; overconfidence breeds unintended consequences.

Conclusion: Rethinking Power

In a region often reduced to structural determinism – oil reserves, sectarian divides, colonial borders – Jensen and Meckling’s agency theory reframes MENA geopolitics as a complex web of incentives, misalignments, and evolving power relations. It reminds us that proxies are not puppets, aid is not pure leverage, and rulers are not omnipotent principals.

Ultimately, the costs of agency are the price of pursuing power indirectly. For policymakers, recognising these costs is the first step toward crafting strategies rooted in reality rather than wishful thinking.