scholarly journals Bounded Rationality in Principal-Agent Relationships

2017 ◽  
Vol 18 (4) ◽  
pp. 411-443
Author(s):  
Mathias Erlei ◽  
Heike Schenk-Mathes
Keyword(s):  
Experimental Data ◽  
Moral Hazard ◽  
Agency Theory ◽  
Bounded Rationality ◽  
Social Preferences ◽  
Principal Agent ◽  
Rational Behavior ◽  
Quantal Response ◽  
Boundedly Rational Behavior ◽  
Hidden Action

Abstract We conducted six treatments of a standard moral hazard experiment with hidden action. The behavior in all treatments and periods was inconsistent with established agency theory. In the early periods, behavior differed significantly between treatments. This difference largely vanished in the final periods. We used logit agent quantal response equilibrium (LAQRE) as a device to grasp boundedly rational behavior and found the following: (1) LAQRE predictions are much closer to subjects’ behavior in the laboratory; (2) LAQRE probabilities and experimental behavior show remarkably similar patterns; and (3) including social preferences in LAQRE does not better explain the experimental data; (4) LAQRE cannot explain the contract offers of some players who seem to choose some focal contract parameters.

scholarly journals The Problem of Unilateralism in Agency Theory: Towards a Bilateral Formulation

2017 ◽  
Vol 27 (2) ◽  
pp. 163-182 ◽  
Author(s):  
Sareh Pouryousefi ◽  
Jeff Frooman
Keyword(s):  
Social Interaction ◽  
Asymmetric Information ◽  
Moral Hazard ◽  
Agency Theory ◽  
Adverse Selection ◽  
Principal Agent ◽  
Ethical Behaviour ◽  
Cautionary Tale ◽  
Economic Interactions ◽  
Normative Argument

ABSTRACT:Some business ethicists view agency theory as a cautionary tale—a proof that it is impossible to carry out successful economic interactions in the absence of ethical behaviour. The cautionary-tale view presents a nuanced normative characterisation of agency, but itsunilateralfocus betrays a limited understanding of the structure of social interaction. This article moves beyond unilateralism by presenting a descriptive and normative argument for abilateralcautionary-tale view. Specifically, we discuss hat swaps and role dualism in asymmetric-information principal-agent relationships and argue that the norm of reciprocity can function as a moral solution to agency risks in adverse-selection and moral-hazard problems. Our bilateral cautionary-tale formulation extends the normative boundaries of agency theory, while leaving the fundamental economic assumptions of agency theory intact.

scholarly journals Incentives for Boundedly Rational Agents

2003 ◽  
Vol 3 (1) ◽  
Author(s):  
Suren Basov
Keyword(s):  
Bounded Rationality ◽  
Optimization Procedure ◽  
Rational Behavior ◽  
Sufficient Statistics ◽  
Agent Model ◽  
Rational Agents ◽  
Multicultural Environment ◽  
Principal Agent Model ◽  
Boundedly Rational Behavior ◽  
Optimal Incentives

This paper develops a theoretical framework for analyzing incentive schemes under bounded rationality. It starts from a standard principal-agent model and then superimposes an assumption of boundedly rational behavior on the part of the agent. Boundedly rational behavior is modeled as an explicit optimization procedure, which combines gradient dynamics with imitation and experimentation. The results predict the underprovision of optimal incentives and deviation from a standard sufficient statistics result from the agency literature. It also allows us to address the question of creating the optimal incentives in a multicultural environment.

scholarly journals The debtor-friendly fallacy in business rescue: Agency theory moderation and quasi relationships

2016 ◽  
Vol 19 (4) ◽  
pp. 479-496 ◽  
Author(s):  
Marius Pretorius
Keyword(s):  
Moral Hazard ◽  
Transaction Costs ◽  
Agency Theory ◽  
Adverse Selection ◽  
Information Access ◽  
Principal Agent ◽  
Multiple Relationships ◽  
Regulatory Authorities

Tension often arises when Chapter 6 business rescue practitioners (BRPs) are appointed by directors to rescue their distressed businesses. Regulating by means of standard agency contracting becomes irrelevant in the resulting multiple relationships. Looking through the agency lens, using analytic autoethnography and compiling narratives, this paper explains the perceptions of what appear to be quasiagency relationships and obtains a better understanding of these. The findings suggest that the apparent principal-agent relationships suffer from asymmetries of goals, information access, informal power and diverging perceptions of moral hazard, transaction costs and adverse selection. As a solution, contracting has been shown to have limited value owing to outcome uncertainty and measurability. This is because the tasks of the BRP are non-programmable and term-dependent. The findings provide filing directors, shareholders, creditors, regulatory authorities and BRPs in this newly instituted regime, with enhanced understanding of how the relationships manifest in practice and overcome the non-contractibility of the newly formed relationships.

Agency Theory and Uncertainty in Organizations: An Evaluation

1994 ◽  
Vol 15 (5) ◽  
pp. 649-672 ◽  
Author(s):  
V. Nilakant ◽  
Hayagreeva Rao
Keyword(s):  
Moral Hazard ◽  
Agency Theory ◽  
Adverse Selection ◽  
Contract Design ◽  
Performance Outcomes ◽  
Team Work ◽  
Principal Agent ◽  
Performance Outcome ◽  
Incomplete Knowledge ◽  
Outcome Relationship

This paper evaluates agency theory as a theory of performance outcome. Agency theory attributes uncertainty in performance outcomes to moral hazard, adverse selection and the state of nature. This paper argues that by overlooking two critical sources of outcome uncertainty in organizations — incomplete knowledge about the effort-outcome relationship and lack of agreement about effort and outcome — the generalizability of the theory is strictly limited. Even in such settings where it is generalizable, principal-agent approaches to contract design are unrealistic to the extent that they presume that performance in organizations results exclusively from individual-contributor jobs, exagger ate the degree to which individuals are work-averse, and emphasize the quant ity of effort at the expense of the quality and type of effort. As a theory of performance, principal-agent approaches overstate the importance of opera tional effort and ignore the importance of facilitative effort such as team work.

Strategic Errors and Audit Quality: An Experimental Investigation

2007 ◽  
Vol 82 (3) ◽  
pp. 679-704 ◽  
Author(s):  
Urs Fischbacher ◽  
Ulrike Stefani
Keyword(s):  
Audit Quality ◽  
Relative Proportion ◽  
Financial Statements ◽  
Payoff Matrix ◽  
Rational Behavior ◽  
Quantal Response ◽  
Direct Contrast ◽  
Boundedly Rational Behavior ◽  
Behavior Supports

We report experimental results for a simple bimatrix game between a manager and an auditor. We investigate whether the quality of audited financial statements improves if the relative proportion of perfectly honest auditors increases. We find that the quality of audited reports is higher if computerized auditors who always perform a high audit effort are present. This result is in direct contrast to the Nash prediction for our game. The Quantal Response Equilibrium, which explicitly takes into account boundedly rational behavior, supports our experimental data. Our main findings depend neither on framing nor the payoff matrix we use.

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