Agency Revisited

Ramón Casadesus-Masanell () and Daniel Spulber
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Ramón Casadesus-Masanell: HARVARD BUSINESS SCHOOL

No 201062, Working Papers from Fundacion BBVA / BBVA Foundation

Abstract: The working paper presents a comprehensive overview of the principal-agent model that emphasizes the role of trust in the agency relationship. The analysis demonstrates that the legal remedy for breach of duty can result in a full-information efficient outcome eliminating both moral hazard and adverse selection problems in agency. The legal remedy motivates agents to behave in a trustworthy fashion and principals to place their trust in agents. In contrast to the standard agency model, a complete description of the principal-agent relationship cannot be based on explicit incentives alone but must recognize implicit incentives for trust behavior that derive from the legal, social and market context.These incentives reduce the need to rely on explicit incentives, allowing the principal and agent to reduce transaction costs by using incomplete contracts.

Keywords: Principal-agent; agency theory; incentives; moral hazard; adverse selection; trust; breach of trust; legal remedies; explicit incentives and implicit incentives. (search for similar items in EconPapers)
Pages: 51
Date: 2007-01
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Citations: View citations in EconPapers (1)

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