To Trust or to Monitor: A Dynamic Analysis
AbstractIn 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 InfoPaper 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
Other versions of this item:
- 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 - - - Economic Sociology; Economic Anthropology; Social and Economic Stratification
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-17 (All new papers)
- NEP-CTA-2009-06-17 (Contract Theory & Applications)
- NEP-SEA-2009-06-17 (South East Asia)
- NEP-SOC-2009-06-17 (Social Norms & Social Capital)
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