HomeJournal of Business, Education and Lawvol. 17 no. 1 (2013)

The Principal-Agent Problem: Rationalizing the Utilization of the 20% Internal Revenue Allotment for Socio-Development in LGUs

Teodoro Lloydon C. Bautista

Discipline: Governance, Social Studies



This paper focused on the controversial issue of intergovernmental relations between the national government and local governments. It features an exploratory study to help policy-makers reassess the shortfalls of the Local Government Code more than 20 years since its approval. Specifically, the study had the following objectives: (1) identify and explain the different areas where the conflicts, tensions, and distortions in the national-local government relations often arise; (2) provide an organizational development perspective to understand the nature, function, roles and relationship of the national-local governments; (3) outline the relevant theories and literature which shall enrich the knowledge of principal-agent problems; and (4) discuss the principle of subsidiarity as a viable framework for enhancing national-local government relations and mitigating principal-agent problems.


This research adopted a qualitative-descriptive approach using secondary data analysis and grounded on experience and reality. The conceptual framework underscored the kind of equilibrium essential to national-local government relations. This supports the principle of subsidiarity, where the oversight of national government and local autonomy of LGUs are reconciled. There are six transformative factors that ought to be addressed to establish such equilibrium, namely: 1) Mission; (2) Management style; (3) Motivation; (4) Mechanism; (5) Money; and (6) Monitoring and evalution.


In conclusion, there were four shortfalls in effectively implementing local autonomy and devolution in the Philippines. First, there was an absence of a clear and comprehensive policy framework for decentralization, which could be used to generate political support among decision makers. Second, the initiatives and projects supporting decentralization emphasized short-term concerns rather than long-term sustainability. Third, the development strategies and technologies were not cost-effective to gain a following. Finally, local governments did not fully appreciate their roles and obligations within the context of decentralization and local autonomy.