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To Trust or to Monitor: A Dynamic Analysis

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  • Fali Huang

    ()
    (School of Economics, Singapore Management University)

Abstract

In a principal?agent framework, principals can mitigate moral hazard problems not only through extrinsic incentives such as monitoring, but also through agents intrinsic trustworthiness. Their relative usage, however, changes over time and varies across societies. This paper attempts to explain this phenomenon by endogenizing agent trustworthiness as a response to potential returns. When monitoring becomes relatively cheaper over time, agents acquire lower trustworthiness, which may actually drive up the overall governance cost in society. Across societies, those giving employees lower weights in choosing governance methods tend to have higher monitoring intensities and lower trust. These results are consistent with the empirical evidence.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 11-2007.

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Length: 21 pages
Date of creation: Sep 2007
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:11-2007

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Keywords: Monitoring ; Trustworthiness ; Trust ; Screening ; Economic Governance;

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Cited by:
  1. Bruno S. Frey, 2006. "Evaluitis ? Eine neue Krankheit," CREMA Working Paper Series 2006-18, Center for Research in Economics, Management and the Arts (CREMA).
  2. Fali Huang & Peter Cappelli, 2006. "Employee Screening : Theory and Evidence," Labor Economics Working Papers 22443, East Asian Bureau of Economic Research.
  3. Fali Huang, 2007. "Building Social Trust: A Human Capital Approach," Working Papers 08-2007, Singapore Management University, School of Economics.

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