In consideration of the increasing reliance of states, as well as, non-state actors on the services of PMSCs, the question of how to induce a desired performance of PMSCs becomes highly relevant.
Hence, this dissertation addresses this question in a conjunction of theoretical and empirical approaches.
The remaining of the dissertation unfolds in two steps. Part I of the dissertation outlines the theoretical framework and Part II addresses the theoretical findings in two empirical studies.
CHAPTER 2 reviews and discusses the general literature on PMSCs. In this chapter, I introduce the different branches of scholarly attention towards PMSCs and the most influential studies to date.
Furthermore, I systemize and discuss the controversial scholarly debate on the perils and promises of hiring PMSCs. After that, I present existing theoretical approaches to the study of PMSCs. In the last section, I discuss the conceptual and methodological weaknesses and gaps in the literature and place this study in the context of previous research on PMSCs. Thereby, I point out the added value of this study to the existing literature and introduce my theoretical framework.
13 Blackwater was said to have received US $593 million in revenues from US federal contracts in 2006. Triple Canopy, an armed security provider, was said to have had contracts worth US $170 million in 2007. Aegis Defence Services was said to have revenues of US $113 million in 2005. For more information, see: US Congress (2007).
14 These calculations consider also contractors in Iraq, Bahrain, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates as support for the US Iraq mission.
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CHAPTER 3 discusses the historical and theoretical origins of principal-agent theory and introduces its fundamental assumptions and concepts. The purpose of this chapter is to provide the conceptual basis for the formal principal-agent model presented in the subsequent chapter and to discuss the applicability of principal-agent models for examining PMSCs.
CHAPTER 4 analyzes with the help of a formal-principal agent model, the relationship between a state and a PMSC. The model provides the theoretical foundation for the empirical chapters in which the model’s implications are empirically examined. Building on the literature review in the preceding chapters, I discuss the diverging interests of states and PMSCs, as well as, potential agency problems.
Thereafter, I examine formally why states hire PMSCs in the first place and how they can optimally incentivize them to exercise high effort in fulfilling their tasks. Thereby, I analyze a state’s optimal choice whether to perform a military or security task itself, hire a PMSC and optimally design the contract, or completely abstain from performing the task. One of the main implications of the formal model is that the equilibrium effort level of PMSCs is determined by their variable costs and the expected bonus, more precisely, the state’s credible commitment to later compensate a PMSC for a good performance. In other words, the higher the chance of a bonus, the higher will be the effort level of a PMSC; and the higher the variable costs a PMSC faces, the lower its effort level will be.
These results are the subject of the subsequent empirical chapters.
CHAPTER 5 examines the implication of the formal model regarding the influence of a credibly promised contingent compensation on the effort level of PMSCs. Using a cross-sectional and a panel analysis, I empirically investigate whether there is a measurable difference in the conflict intensity of civil wars in which PMSCs operated compared to those in which PMSCs were not involved and whether there is a difference in the conflict intensity between those conflicts in which the state was able to credibly commit to a bonus and those in which the principal could not promise a bonus. The results of the cross-sectional analysis show that the presence of PMSCs in civil wars is significantly associated with increasing conflict intensity. Furthermore, the empirical results support the implication of the formal models regarding the impact of a bonus on the effort level of PMSCs and show that conflicts in which the state was able to credibly commit to a bonus exhibit lower levels of conflict intensity. The results of the panel analysis, however, are mixed. They neither support the expectation that PMSCs contribute to a worsening of conflict intensity, nor do they provide evidence for the assumption that a bonus increases the effort level of PMSCs. Rather, these results indicate that the presence of PMSCs is associated with lower levels of conflict intensity.
CHAPTER 6 examines the implication of the formal model regarding the influence of high variable costs on the effort level and with that on the profit of PMSCs. Using an event study, I explore how investors of publicly traded PMSCs react to increasing variable costs in the form of a deteriorating
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security situation in countries which the companies operate in. At first sight, the results support the assumption that investors tend to invest less in PMSCs’ stocks after insecurity events. However, a detailed look into the individual events reveals that these results are not robust. In other words, the results of the event study can neither support nor refuse the assumption that a deteriorating security situation decreases investor’s expectations about future profits if PMSCs.
In the last chapter, I summarize my argument and my theoretical and empirical approach.
Furthermore, I highlight the contribution of this study for researching the private military and security industry and discuss the policy implications that follow from my findings. Lastly, I discuss avenues for future research.
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