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.

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 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.

Founders, Private Equity Investors, and Underpricing in Entrepreneurial IPOs

2009 ◽  
Vol 33 (4) ◽  
pp. 909-928 ◽  
Author(s):  
Garry D. Bruton ◽  
Salim Chahine ◽  
Igor Filatotchev
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Initial Public Offering ◽  
Private Equity ◽  
Performance Outcomes ◽  
Agency Conflicts ◽  
Ipo Underpricing ◽  
Entrepreneurial Firm ◽  
Public Offering ◽  
Retained Ownership

One of the most important events in the life of an entrepreneurial firm is when it undergoes an initial public offering (IPO). Combining signaling theory with research on the role of information asymmetry in pricing of IPOs this study examines the performance outcomes of two distinct types of agency conflicts at the time of the IPO: adverse selection and moral hazard. Empirical results show a curvilinear (U–shaped) relationship between founders‘ retained equity and underpricing. This suggests that founders‘ retained ownership in an entrepreneurial IPO limits adverse selection problems and the associated IPO underpricing; however, at some point entrepreneurs‘ investment and risk become so great that entrepreneurs may no longer act rationally and moral hazard increases. Empirical findings also indicate that the retained ownership of business angels has a stronger mitigating effect on adverse selection and moral hazard problems than do venture capitalist investors.

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.

Agency, Information, and the Structure of Moral Problems in Business

2006 ◽  
Vol 28 (2) ◽  
pp. 177-195 ◽  
Author(s):  
Bryan W. Husted
Keyword(s):  
Asymmetric Information ◽  
Moral Hazard ◽  
Information Asymmetry ◽  
Adverse Selection ◽  
Information Economics ◽  
Principal Agent ◽  
Ethical Problems ◽  
Agent Model ◽  
Moral Problems ◽  
Principal Agent Model

Many ethical problems in business can be characterized as having elements of incomplete and/or asymmetric information. This paper analyzes such problems using information economics and the principal-agent model. It defines the nature of moral problems in business and then applies principal-agent models involving adverse selection and moral hazard to these problems. Possible solutions to conditions of information asymmetry are examined in order to support the development of organizational virtue.

scholarly journals Peran Kelembagaan Perdesaan untuk Keberlanjutan Penerapan SRI di Kabupaten Karawang

2014 ◽  
Vol 14 (2) ◽  
pp. 109-127
Author(s):  
Luh Putu Suciati ◽  
Bambang Juanda ◽  
Akhmad Fauzi ◽  
Ernan Rustiadi
Keyword(s):  
Moral Hazard ◽  
Transaction Costs ◽  
Adverse Selection ◽  
Institutional Economics ◽  
Transaction Cost Economics ◽  
Revenue Sharing ◽  
Principal Agent ◽  
Farm Work ◽  
Logit Regression ◽  
Farmer Groups

AbstractSustainability of System of Rice Intensication (SRI) requires rural institution role. The study was conducted in Karawang and uses institutional economics approach and logit regression. The analysis shows potential problems of SRI related with principal-agent/institutional relation and economics transaction costs. Strengthening the activities within farmer groups will reduce economics transaction costs in beginning of application. Farmer will choose "bagi hasil/revenue sharing" as land management cooperation with moderate risks and transaction costs. Monitoring and incentive mechanism will reduce problems of adverse selection and moral hazard. Some factors which determine the sustainability of SRI are production, principal position, off farm work and ex ante transaction costs.Keywords: Rural Institution, Transaction Cost Economics, System of Rice Intensication AbstrakKeberlanjutan penerapan metode System of Rice Intensication (SRI) membutuhkan peran kelembagaan perdesaan. Studi dilakukan di Kabupaten Karawang dan menggunakan pendekatan kelembagaan ekonomi dan regresi logit. Hasil analisis menunjukkan potensi problem metode SRI terkait hubungan kelembagaan principal-agent dan biaya transaksi ekonomi. Penguatan kinerja kelembagaan perdesaan melalui kegiatan bersama dalam kelompok tani mengurangi biaya transaksi ekonomi pada awal aplikasi SRI. Pilihan kerjasama pengelolaan lahan pola bagi hasil banyak dipilih terkait risiko dan biaya transaksi yang moderat. Potensi masalah berupa moral hazard dan adverse selection dapat dikurangi dengan pemantauan dan mekanisme insentif. Faktor determinan keberlanjutan penerapan metode SRI adalah peningkatan produksi padi, posisi sebagai pemilik lahan, pekerjaan di luar usaha tani, dan biaya transaksi sebelum pelaksanaan.Kata kunci: Kelembagaan Perdesaan, Biaya Transaksi Ekonomi, System of Rice Intensication

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