Introduction

Alexander Pepper
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Alexander Pepper: London School of Economics and Political Science

Chapter 1 in The Economic Psychology of Incentives, 2015, pp 1-9 from Palgrave Macmillan

Abstract: Abstract Agency theory has been a major component of the economic theory of the firm since the 1970s. It has also come to dominate academic thinking about executive reward. Agency theory asserts that the interests of shareholders (who, for these purposes, are the principals in the principal-agent relationship) and top managers (their agents) are different, and at times radically diverge. In order to align the interests of principals and their agents, boards of directors, acting on behalf of shareholders, create incentive contracts which reward executives financially if shareholders’ returns increase, but not otherwise; or so the theory goes. Agency theory also postulates the active monitoring of the actions of top managers by shareholders through a process which we now know as corporate governance.

Keywords: Corporate Governance; Agency Theory; Behavioural Economic; Executive Compensation; Senior Executive (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-40925-6_1

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DOI: 10.1057/9781137409256_1

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