IS AGENCY THEORY SELF‐ACTIVATING?

Daniel Arce

Economic Inquiry, 2007, vol. 45, issue 4, 708-720

Abstract: This article examines the conditions under which the principal‐agent model is self‐activating/socially causal. We do so by exploring a principal‐agent framework that allows for the possibility that rational agents may hold intrinsic preferences for autonomy in decision making and experience disutility from being monitored. Using a dynamic model of preference formation, we identify conditions under which the principal‐agent model is self‐activating in that, over time, the introduction of the model in an otherwise efficient monitor‐worker relationship leads to the inefficient adoption of the agency model. We also examine the extent to which the agency model is robust when autonomy‐preferring agents are introduced into the population. (JEL G30, L20, C72)

Date: 2007
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