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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Publisher Info
Paper provided by Singapore Management University, School of Economics in its series Working Papers with number
11-2007.
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
Find related papers by JEL classification: D2 - Microeconomics - - Production and Organizations J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology
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