AbstractThe 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.
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Bibliographic InfoPaper provided by Fundacion BBVA / BBVA Foundation in its series Working Papers with number 201062.
Date of creation: Jan 2007
Date of revision:
Principal-agent; agency theory; incentives; moral hazard; adverse selection; trust; breach of trust; legal remedies; explicit incentives and implicit incentives.;
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- Ramon Casadesus-Masanell & Tarun Khanna, 2003. "Globalization and Trust: Theory and Evidence from Cooperatives," William Davidson Institute Working Papers Series wp592, William Davidson Institute at the University of Michigan.
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