Integrity as a bonding mechanism in agency theory

Michael Jensen’s late-career work on integrity is often interpreted as a departure from agency theory or as an attempt to introduce ethical considerations into a positive framework. This paper argues instead that integrity can be reconstructed as an extension internal to agency theory itself. Drawing on the Jensen and Meckling decomposition of agency costs, integrity is modelled as a bonding cost; a self-imposed constraint that raises the private cost of opportunistic behaviour and thereby economises on monitoring and reduces residual loss. Incorporating Buchanan’s constitutional-stage logic, the analysis shows that integrity relocates rational optimisation to the choice of rules rather than to particular transactions. Integrity is further classified as an informal institution whose effectiveness depends on decentralised enforcement and institutional context. The paper concludes that integrity is neither an ethical supplement nor a scalable substitute for formal governance, but a bounded informal bonding mechanism whose effectiveness attenuates with organisational scale.