Ex ante versus Ex post Governance: A Behavioral Perspective

Hoeppner Sven () and Kirchner Christian ()
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Hoeppner Sven: Ghent University Law School, Ghent, Belgium
Kirchner Christian: Humboldt University Berlin Law School, Berlin, Germany Humboldt University Berlin School of Business and Economics, Berlin, Germany Wittenberg Center for Global Ethics, Berlin, Germany

Review of Law & Economics, 2016, vol. 12, issue 2, 227-259

Abstract: Problems resulting from the delegation of competencies from one actor to another are at the heart of any governance discussion. While the conventional agency view strongly emphasizes that such problems can be solved ex post by monitoring and control strategies, the contract view proposes to tackle said problems ex ante through alignment of the agent’s incentives to those of the principal by, for instance, incentive contracts. In this paper, we introduce a behavioral perspective to this discussion. We will spotlight that the ex post strategies are behaviorally dysfunctional. The effect of self-serving and hindsight tendencies can hardly be overcome. Ex ante strategies, in contrast, suffer from problems of incentive design. However, proper incentive design can account for behavioral decision patterns. On this ground we argue that incentive contracting appears to be superior to monitoring approaches to solve the principal–agent conflict. To address behavioral problems in governance systems, we propose a counterintuitive shift of rule-making competencies: from public to private ordering for monitoring strategies and from private to public ordering for incentive contracting.

Keywords: corporate governance; agency problem; monitoring; incentive contracts; behavioral economics (search for similar items in EconPapers)
JEL-codes: D01 D03 G34 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/rle-2015-0003

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