Endogenous Verifiability and Relational Contracting

Principal-agent models usually invoke the strong assumption that the parties know for sure ex ante whether a variable is verifiable or not. This paper assumes that only the probability of verification is known, and that this probability is endogenously determined. We analyze a principal-agent relationship where the verifiability of the agent's output is determined by the principal's investment in drafting an explicit contract. The model is well suited for analyzing the relationship between explicit contracting, legal courts, trust, and relational contracting. In particular, we show how trust—established through repeated interaction—and legal courts may induce contractual incompleteness. (JEL D82, D86)

Download Full-text

7. Relations between principal and agent

Commercial Law ◽

10.1093/he/9780199692088.003.0007 ◽

2017 ◽

Author(s):

MA Clarke ◽

RJA Hooley ◽

RJC Munday ◽

LS Sealy ◽

AM Tettenborn ◽

...

Keyword(s):

Third Parties ◽

Duty Of Care ◽

Principal Agent ◽

Unanswered Question ◽

Fiduciary Duties ◽

The Relationship ◽

Principal Agent Relationship

This chapter focuses on the relationship between principal and agent. In general, the rights and duties of an agent derive either from a contract made with the principal or from the fiduciary nature of their relationship. Although most agencies are consensual, an agency may also arise because of the apparent or usual authority of the agent or through necessity. Such agencies are non-consensual, and whether they give rise to the normal incidents of a principal–agent relationship remains an unanswered question. This chapter considers the duties of the agent, such as duty of care and skill and fiduciary duties, as well as rights relating to remuneration, reimbursement and indemnity, and lien. It also discusses the ways by which agency may be terminated involving principals and agents, commercial agents, and third parties. A number of relevant cases are cited throughout the chapter.

Download Full-text

Political Economy of Fiscal Institutions

10.1093/oxfordhb/9780199548477.003.0026 ◽

2009 ◽

Cited By ~ 9

Author(s):

Jürgen von Hagen

Keyword(s):

Political Economy ◽

Budget Process ◽

Principal Agent ◽

Electoral Institutions ◽

Public Funds ◽

Fiscal Institutions ◽

Common Pool ◽

Ex Ante ◽

The Common ◽

Principal Agent Relationship

This article discusses and reviews research on fiscal institutions. It deals with ex ante rules and discusses the roles of electoral institutions. One section in this article also considers the budget process. The research that is reviewed in this article uses the principal-agent relationship between the voter and the politicians and the common-pool property of public funds as its starting points.

Download Full-text

5. Creation of agency, and the authority of the agent

Commercial Law ◽

10.1093/he/9780199692088.003.0005 ◽

2017 ◽

Author(s):

MA Clarke ◽

RJA Hooley ◽

RJC Munday ◽

LS Sealy ◽

AM Tettenborn ◽

...

Keyword(s):

Principal Agent ◽

Agency Relationship ◽

The Creation ◽

The Relationship ◽

Principal Agent Relationship

This chapter focuses on the creation of principal–agent relationship and the authority of the agency. The relationship between principal and agent may be created in four ways: through express or implied agreement between principal and agent; under the doctrine of apparent authority; by operation of law; and through ratification of an unauthorised agent's acts by the principal. Agency arising out of agreement will always be consensual, but it need not be contractual. An agency may be gratuitous. Even in the commercial context, the agency may not be contractual (although this is rare). After explaining how the agency relationship is created, the chapter examines the authority of the agent such as actual authority, apparent authority, and usual authority. A number of relevant cases are cited throughout the chapter.

Download Full-text

Brain and Genes

Birth of Intelligence ◽

10.1093/oso/9780190908324.003.0005 ◽

2020 ◽

pp. 92-106

Author(s):

Daeyeol Lee

Keyword(s):

Division Of Labor ◽

Principal Agent ◽

Complex Structures ◽

Principal Agent Theory ◽

Agent Theory ◽

The Relationship ◽

The Brain ◽

Principal Agent Relationship

During evolution, more complex structures and functions emerge as a result of division of labor and specialization. Often, this leads to a conflict between a principal who determines the nature of division of labor and an agent who implements the overall goal set by the principal. The principal–agent relationship is a useful construct to understand the relationship between the genes and the brain. This chapter covers the key assumptions of the principal–agent theory and how this can be validated in the case of gene–brain relationship. The author argues that because the brain must learn solutions to problems that genes cannot handle, learning is central to intelligence.

Download Full-text

Auditing versus monitoring and the role of commitment

Review of Accounting Studies ◽

10.1007/s11142-021-09647-z ◽

2021 ◽

Author(s):

Peter-J. Jost

Keyword(s):

Moral Hazard ◽

Principal Agent ◽

Noisy Signal ◽

Additional Information ◽

Ex Ante ◽

Effort Choice ◽

High Effort ◽

Principal Agent Relationship

AbstractThis paper studies the effect of timing and commitment of verification in a principal-agent relationship with moral hazard. To acquire additional information about the agent’s behavior, the principal possesses a costly technology that produces a noisy signal about the agent’s effort choice. The precision of this signal is affected by the principal’s verification effort. Two verification procedures are discussed: monitoring where the principal verifies the agent’s behavior simultaneously with his effort choice and auditing where the principal can condition her verification effort on the realized outcome. As it is well known, the principal prefers to audit the agent’s behavior if she can commit to her verification effort at the time of contracting. The main contribution of this paper is to highlight the importance of commitment by the principal to her verification effort. In particular, I show that, when the principal cannot commit to her verification effort ex-ante, the principal strictly prefers monitoring to auditing if the gains from choosing high effort are sufficiently high.

Download Full-text