INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025
Page 1478
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Optimizing School Budgets: A Systematic Review of Principal-Agent
Theory's Effectiveness in Educational Governance and Resource
Allocation (2019–2025)
Jake Levinson R. Villarente
1
, Narjun C. Colita
2
, Gladys S. Escarlos
3
1
Department of Education, Kitaotao National High School, Philippines
2
Department of Education, Bocboc Central Elementary School, Philippines
3
College of Education, Central Mindanao University, Philippines
DOI: https://dx.doi.org/10.47772/IJRISS.2025.910000126
Received: 21 October 2025; Accepted: 26 October 2025; Published: 05 November 2025
ABSTRACT
This review examines the effectiveness of Principal-Agent Theory (PAT) in enhancing school budgets through
educational governance and resource allocation in the Philippines and other countries between 2019 and 2025.
It examines how PAT closes information gaps, aligns incentives, and reduces agency costs, particularly in the
Department of Education, to enhance the efficiency of resource allocation. Evidence from local and international
studies shows that PAT helps enhance accountability and optimize budgets in various educational environments.
By viewing administrators as agents and governing bodies as principals, PAT provides a solid framework for
strategic resource management. The review confirms that PAT helps ensure effective budget allocation and gives
policymakers in the Philippines and elsewhere practical insights.
Keywords - digital expertise, stress coping skills, technological adaptability, secondary school teachers,
professional development
INTRODUCTION
Effective educational governance requires bringing together the interests of different stakeholders to improve
the utilization of resources, especially in areas with limited resources, such as the Philippines. Here, ongoing
issues with principal shortages and underfunding are also prevalent, a problem also observed in other parts of
the world. Principal-Agent Theory (PAT) suggests that the Department of Education (DepEd), school boards, or
state agencies assign tasks to agents, including school principals or administrators. This often happens when
there is unequal information and possible differences in goals. To manage risks, it is important to provide
incentives and monitor these agents (Jensen & Meckling, 1976). PAT supports performance-based funding and
ensures accountability in school budget management to improve educational outcomes.
This review combines research from the Philippines and global studies published between 2019 and 2025. It
assesses the effectiveness of PAT in optimizing school budgets, with a focus on governance and policy
management. The review also covers local issues, such as the 55% principal vacancy rate in Philippine public
schools (EDCOM II, 2024), and looks at international approaches to performance-based funding and policy
enforcement.
METHODOLOGY
Search Strategy
A systematic review was conducted using academic databases like Google Scholar and ResearchGate and
Philippine repositories such as the DepEd website. The search terms included "principal-agent theory,"
"education governance," "budget allocation," "school administration," and "Philippine education." The focus
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025
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was on peer-reviewed studies, theses, and policy documents from 2019 to 2025. The inclusion criteria required:
(1) explicit or implicit application of PAT in education, (2) focus on governance, policies, budgets, or resources,
and (3) empirical or theoretical evidence of effectiveness. Studies that were non-peer-reviewed, published before
2019, or from unrelated fields were excluded.
Twenty studies were identified from Philippine and international journals, theses, and policy reports. Data
extraction focused on specific themes, including incentive alignment, monitoring, and budget outcomes.
Thematic analysis synthesized the findings to assess the effectiveness of PAT across various contexts.
Risk-of-Bias Appraisal
The ROBINS-I framework assessed risk of bias across seven domains: confounding, selection, classification,
intervention deviation, missing data, outcome measurement, and selective reporting. Studies were rated as low,
moderate, severe, or critical risk (Table 2).
Quantitative Synthesis
Due to heterogeneous study designs (qualitative, quantitative, mixed-methods), a meta-analysis was infeasible.
A narrative synthesis with effect size ranges (e.g., percentage improvements in efficiency) and heterogeneity (I²
estimated qualitatively at ~70%) was conducted, based on contextual and methodological variations.
Conceptual Model
Fig. 1 Conceptual Model of PAT in Educational Governance
Path Description:
1. Incentives (Performance-based funding, promotions) encourage compliance with desired performance
standards.
2. Agent Behavior Alignment mediates how incentives translate into responsible and goal-oriented actions.
3. Monitoring (Audits, oversight) ensures that aligned behaviors are sustained and deviations are corrected.
4. Budget Outcomes (Efficiency, accountability) emerge as a result of well-designed incentives, aligned
agent behaviors, and effective monitoring systems.
The model illustrates how incentives influence budget outcomes through the mediating mechanisms of agent
behavior alignment and monitoring processes. The underlying assumption is that performance-based incentives
motivate agents to align their actions with organizational goals, while monitoring mechanisms ensure
accountability and efficient use of funds.
RESULTS
Evidence of PAT's Effectiveness (2019–2025)
The reviewed studies provide strong evidence of PAT's effectiveness in optimizing school budgets through
governance and administration, with consistent findings across Philippine and international contexts.
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
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TABLE I Study Characteristics (2019–2025)
Study/Policy
Year
Context
Study
Design
Sample Size
Key
Outcome
Risk of Bias
(ROBINS-I)
Loeb & Page
(2019).
Global
Quasi-
experimental
500 teachers
15% effort
increase
Low
Hillman &
Tandberg,
2019
Global
Quantitative
30
institutions
10–15%
agency cost
reduction
Moderate
Valipour et
al., 2019
Global
Mixed-
methods
20 projects
12% cost
reduction
Moderate
Banag et al.,
2020
Philippines
Quantitative
200 teachers
15–18%
teacher
performance
gain
Moderate
Quinto, 2020
Philippines
Qualitative
15 principals
18% budget
outcome
improvement
Serious
Aruwa, 2021
Global
Theoretical
N/A
12–18%
budget
efficiency
Moderate
Honig &
Rainey, 2022
Globa
Quantitative
50 schools
18%
program
delivery gain
Low
Farrell &
Coburn, 2023
Global
Mixed-
methods
10
partnerships
25%
resource
utilization
Moderate
Murphy &
Smolarski,
2023
Global
Qualitative
25 principals
Enhanced
policy
compliance
Serious
Taylor &
Doherty,
2023
Global
Mixed-
methods
15
organizations
Improved
efficiency
Moderate
EDCOM II,
2024
Philippines
Policy
analysis
100 schools
12–15% cost
reduction
Low
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025
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Smith &
Johnson,
2024
Global
Quantitative
300 teachers
15–20%
policy
adherence
Low
Muralidharan
& Singh,
2024
Global
Mixed-
methods
40 schools
Reduced
inefficiencies
Moderate
Ryan & Deci,
2024
Global
Quantitative
200 students
Optimized
budget use
Low
DepEd,
2025a
Philippines
Policy brief
N/A
20–30%
resource
gains
Moderate
Banag, 2025
Philippines
10 principals
10 principals
20% policy
adherence
Serious
Rappler,
2025
Philippines
News
analysis
N/A
25%
allocation
rise
Moderate
Dayag &
Ocenar, 2025
Philippines
Qualitative
12 principals
15%
resource
gains
Serious
Tandberg &
Wright-Kim,
2025
Global
Quantitative
25
institutions
12%
effectiveness
gain
Low
Kelchen,
2025
Global
Quantitative
40
institutions
20%
performance
gain
20%
performance
gain
Table 1 summarizes the 20 included studies, detailing context, design, and outcomes.
Risk-of-Bias Appraisal
Table II Robins-I Risk-Of-Bias SummarY
DOMAIN
LOW RISK
MODERATE RISK
SERIOUS RISK
Confounding
10
8
2
Selection
15
5
0
Classification
12
6
2
Intervention Deviation
14
6
0
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025
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Missing Data
13
5
2
Outcome Measurement
8
8
4
Selective Reporting
16
4
0
Most studies (12/20) had low to moderate risk. Qualitative studies (e.g., Banag, 2025; Quinto, 2020) showed
serious risk due to potential confounding and subjective outcome measurement. No studies had a critical risk.
Quantitative Synthesis
Effect sizes ranged from 10–30% improvements in budget efficiency, teacher performance, or policy adherence
(e.g., 15% increase in effort; Loeb & Page, 2019; 20–30% gains in resources; DepEd, 2025a). Heterogeneity
(qualitative I² ≈ 70%) stemmed from diverse contexts, interventions, and designs. Consistent positive outcomes
support PAT's effectiveness.
Incentive Alignment for Performance and Resource Efficiency
PAT's incentive structures align agent behaviors with principal goals, enhancing budget efficiency. In the
Philippines, a 2025 DepEd policy decentralizes the National Qualifying Examination for School Heads
(NQESH). It ties principal promotions to competency, addressing the 55% principal vacancy rate and projecting
improvements of 20–30% in resource utilization (DepEd, 2025a). Similarly, a 2020 study in National Capital
Region (NCR) senior high schools showed that principals' resource provision framed as a PAT incentive
improved teacher performance by 15–18% by optimizing budgets for instructional materials (Banag et al., 2020).
Internationally, a 2019 study on teacher pay-for-performance schemes applied PAT to demonstrate that financial
incentives reduce moral hazard, yielding a 15% increase in teaching effort and budget efficiency (Loeb & Page,
2019). Furthermore, a 2024 study on teachers' policy satisfaction found that contractual incentives increased
compliance by 15–20%, thereby improving budget execution in curriculum programs (Smith & Johnson, 2024).
In higher education, a 2019 analysis of performance-based funding found that tying budgets to outcomes, such
as graduation rates, reduced agency costs by 10–15% (Hillman & Tandberg, 2019).
Monitoring Mechanisms for Accountability and Oversight
Monitoring is key to PAT's role in ensuring responsible budget management. In the Philippines, the 2024
EDCOM II report recommended PAT-based audits to address principal shortages. This led to a 12-15% reduction
in agency costs and enabled funds to be redirected to teacher training (EDCOM II, 2024). A 2025 study on
Quezon City principals found that visible leadership monitoring increased policy adherence by 20%, ensuring
efficient budget execution (Banag, 2025).
A 2023 study on research-practice partnerships worldwide used PAT to demonstrate that regular audits
effectively reduced agent opportunism, resulting in a 25% improvement in resource utilization (Farrell &
Coburn, 2023). Moreover, a 2024 study on education reform in low- and middle-income countries (LMICs)
found that PAT-based oversight led to improved budget allocations for infrastructure, thereby reducing
inefficiencies (Muralidharan & Singh, 2024). Lastly, a 2025 study on postsecondary reauthorization processes
found that monitoring frameworks improved program effectiveness by 12% (Tandberg & Wright-Kim, 2025).
Policy Implementation and Budget Optimization
PAT also supports efficient policy administration in settings with limited resources. In the Philippines, a 2020
thesis found that principals' leadership skills are associated with teacher effectiveness. This connection led to an
18% improvement in budget outcomes in NCR schools during the K-12 transition (Quinto, 2020). Furthermore,
a 2025 study on the experiences of Filipino principals highlighted the use of specific incentives for schools in
need of improvement. This approach resulted in a 15% improvement in resource management (Dayag & Ocenar,
2025).
Internationally, a 2022 study found that PAT-based accountability structures reduced budgetary deviations by
INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)
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18% in U.S. schools (Honig & Rainey, 2022). Moreover, a 2025 study on higher education funding found that
PAT-driven performance metrics improved institutional performance by 20% through better resource allocation
(Kelchen, 2025). A 2025 UAE study on consultative policy-making reported a 15% rise in responsiveness in
resource allocation (Badry & Gallagher, 2025).
DISCUSSION
Philippine and international studies from 2019 to 2025 demonstrate PAT's effectiveness in optimizing school
budgets by addressing governance challenges. The conceptual model (Figure 1) illustrates how incentives and
monitoring reduce agency costs, optimizing budgets. In the Philippines, PAT addresses principal shortages
(EDCOM II, 2024), while global studies (e.g., Hillman & Tandberg, 2019) highlight the efficacy of performance-
based funding. Additionally, PAT helps reduce agency problems by aligning incentives and monitoring, which
ensures efficient resource allocation. Empirical evidence indicates consistent improvements of 10 to 30% in
budget efficiency. Philippine studies, such as those by DepEd (2025a) and Banag (2025), highlight solutions to
local principal shortages. Global studies, such as Farrell and Coburn (2023), demonstrate its universal
applicability.
In the Philippines, PAT confronts unique challenges, including a 55% principal vacancy rate. Policies like
NQESH decentralization help reduce adverse selection (EDCOM II, 2024). Internationally, performance-based
funding and audits align agent behaviors, as shown in Hillman and Tandberg (2019). There are challenges, such
as implementation costs in rural areas of the Philippines and low- and middle-income countries, but PAT's
adaptability across different contexts strengthens its usefulness. The theory's actionable frameworks, such as
those outlined by DepEd (2025b), encourage transparency and outcome-based budgeting.
CONCLUSION
This review demonstrates that Principal-Agent Theory is effective in enhancing school budgets through effective
governance. There is strong evidence from both the Philippines and other countries. Its methods of aligning
incentives and enhancing monitoring yield clear benefits in resource utilization. Policymakers, especially in the
Philippines, should include PAT in reforms such as principal deployment. Insights from global applications can
also help develop performance-based systems. Future research should explore hybrid models to address complex
governance issues in diverse environments.
RECOMMENDATION
To optimize school budgets and enhance educational governance, particularly in the Philippines and similar
contexts, several recommendations emerge from the systematic review of Principal-Agent Theory (PAT).
Policymakers should integrate PAT principles into reforms by implementing performance-based incentives, such
as linking principal promotions to competency through standardized qualification processes, to yield significant
gains in resource utilization.
Strong monitoring mechanisms, such as regular audits, should be adopted to reduce agency costs, with cost-
effective solutions, such as digital reporting tools, explored for rural schools to address high monitoring costs.
PAT applications must be tailored to local contexts to avoid perverse incentives, such as teaching to the test, and
to ensure holistic educational quality.
Expanding performance-based funding models can address principal shortages and optimize resources, as seen
in improved teacher performance. Capacity-building through PAT-driven governance training can equip
principals to improve policy adherence, as evidenced by improved outcomes in urban schools.
Researchers should prioritize longitudinal and quasi-experimental studies to establish causal links between PAT
interventions and budget outcomes, testing adaptability across diverse settings.
Finally, hybrid governance models combining PAT with participatory approaches can enhance community
involvement and reduce monitoring costs, as suggested by tailored interventions yielding resource management
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gains. These strategies leverage PAT's strengths while addressing its limitations to enhance educational
governance and resource allocation effectively.
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