Is Agency Theory Self‐activating?

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) Copyright 2007 Western Economic Association International.

Incomplete Information, Dynamic Stability and the Evolution of Preferences: Two Examples

“…We then rely on numerical solutions of the ODE system and explain why it is appropriate in such cases to focus on time averages. Our results complement and extend those of Arce (2007) and other theoretical work on models of indirect evolution, e.g. Ok and Vega-Redondo (2001) and Dekel, Ely and Yilankaya (2007).…”

“…Arce (2007) sets wage at the value w = √ vm that maximizes the Employer's expected payoff; in this case (1) implies restrictions on the gross payoff v. …”

“…We illustrate the techniques using two recent models of preference formation, Arce (2007) and Friedman and Singh (2009). Our idea is that generality is best developed from specific instances and we chose these two models as relatively simple instances of the complexities noted two paragraphs earlier.…”

“…Five of these equations roughly parallel the ODEs for the Arce (2007) model and the other equation uses gradient dynamics to describe evolution of the preference parameter. In line with FS09 and the previous section, we assume that individuals adjust their strategy mixes rapidly relative to the rate of change in population shares (which adjust via entry and exit, or type switching).…”

“…The first step in our analysis is to write out the expected payoff and expected utilities given all state variables, including the population share of each type of Workers, which Arce (2007) takes as exogenous. Then we introduce and analyze a system of four coupled ordinary differential equations (ODEs) that characterizes the evolution of the state variables.…”