An Experimental Test of Fairness Under Agency and Profit Constraints (With Notes on Implications for Corporate Law)
AbstractBuilding on the scholarship using ultimatum game experiments to explore the presence of fairness norms in bargaining exchanges, the authors test whether such norms are affected by agency relationships alone or agency relationships linked with a duty to maximize returns to the principal. The findings are dramatic. The study, the first of its kind, indicates a significant decrease in a concern for fairness (defined as a willingness to share a pot of money) when a participant in a bargaining transaction acts as an agent for another and owes a duty to maximize the return to the principal. We find no such decrease when the agent is acting without the explicit duty to maximize return to the principal. These findings were made in the context of modified ultimatum game experiments conducted among first year law students. While recognizing the limitations of the experiments as well as the risks of extrapolating from experiment to actual practice, our findings suggest that existing corporate law which requires directors to act as agents of shareholders and to maximize return to those shareholders may provide incentives to directors to act unfairly toward non-shareholder stakeholders. These incentives, which currently exist in the law and norms governing corporate governance may actually encourage inefficient results that may reduce payoffs to corporations.
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Bibliographic InfoPaper provided by Boston College Law School in its series Boston College Law School Faculty Papers with number bc_bclsfp-1003.
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Web page: http://www.bc.edu/schools/law/
corporate governance; agency; fairness;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-26 (All new papers)
- NEP-EXP-2004-07-26 (Experimental Economics)
- NEP-LAW-2004-07-26 (Law & Economics)
- NEP-REG-2004-07-26 (Regulation)
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