In Chapter 3 we showed that careful selection of agents – the power to hire – can mitigate adverse selection problems. Yet perhaps the most important ex ante sanction that a principal can write into an implicit contract about an agent's ex post behavior is the power to dismiss that agent – the power to fire that agent if he or she does not perform up to certain standards. Principals who possess dismissal power can keep an agent in line and minimize the problem of moral hazard, which occurs when an agent violates the spirit of a contract after it has been signed. In contrast, principals who lack the ability to rid themselves of a wayward agent have good reason to fear the problem of moral hazard.

All democracies possess ways to remove and replace national leaders against their will. However, important differences exist across democratic regimes in terms of parties' ability to remove and replace their leaders against their will while those leaders are serving as incumbent heads of government. For example, once in office, parliamentary prime ministers remain subject to ongoing partisan as well as legislative confidence. This sets a relatively low bar for their removal. And indeed, as we detail below, parties in parliamentary systems regularly remove their own prime ministers between elections. Direct partisan control over the premiership minimizes the danger of moral hazard.