The More Closely We Are Watched, the Better We Behave?

This chapter provides a brief survey of the economic literature on transparency. The conceptual tool used by economists is the principal-agent model, a game-theoretic setting in which transparency corresponds to the ability of the principal to observe what the agent does. Holmström (1979) provides a powerful and general rationale for full transparency. One can argue that the increase in accountability is not sufficient to offset other drawbacks such as the violation of privacy, the direct cost of disclosure, or the revelation of sensitive information. Alternatively, one can attack the link between transparency and accountability: it is not necessarily true that more disclosure makes the agent behave better. Holmström showed that, in a world of complete contracts, the more the principal knows about the agent, the better the agent behaves. Some objections to Holmström – the right to privacy, the direct cost of disclosure, the risk that hostile parties learn sensitive information – are perfectly valid, but they find limited application in politics, corporate governance, and other important areas.