Trust in Agency

Ramon Casadesus‐Masanell

Journal of Economics & Management Strategy, 2004, vol. 13, issue 3, 375-404

Abstract: Existing models of the principal–agent relationship assume the agent works only under extrinsic incentives. However, many observed agency contracts take the form of a fixed payment. For such contracts to work, the principal must trust the agent to work in the absence of incentives. I show that agency fosters the advent of intrinsic motivation and trustworthy behavior. Three distinct motivational schemes are analyzed: norms, ethical standards, and altruism. I identify conditions under which these mechanisms arise and show how they promote trust. The analysis alters several important predictions of conventional models: (1) Better outcomes may ensue in highly uncertain environments; (2) the principal is better off the more the agent is risk averse; and (3) larger equilibrium extrinsic incentives need not be associated with larger effort or larger total surplus.

Date: 2004
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https://doi.org/10.1111/j.1430-9134.2004.00016.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:13:y:2004:i:3:p:375-404

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