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Trust As a Means of Improving Corporate Governance and Efficiency

  • Ralph Chami
  • Connel Fullenkamp

Agency problems within the firm are a significant hindrance to efficiency. We propose trust between coworkers as a superior alternative to the standard tools used to mitigate agency problems: increased monitoring and incentive-based pay. We show how trust induces employees to work harder, relative to those at firms that use the standard tools. In addition, we show that employees at trusting firms have higher job satisfaction, and that these firms enjoy lower labor cost and higher profits. Finally, we show how trust may also be easier to use within the firm than the standard agency-mitigation tools.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/33.

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Length: 36
Date of creation: 01 Feb 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/33
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  1. Paul H. Kupiec & James M. O'Brien, 1995. "A pre-commitment approach to capital requirements for market risk," Finance and Economics Discussion Series 95-36, Board of Governors of the Federal Reserve System (U.S.).
  2. Rotemberg, Julio J, 1994. "Human Relations in the Workplace," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 684-717, August.
  3. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  4. Vito Tanzi, 1998. "Corruption Around the World: Causes, Consequences, Scope, and Cures," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 559-594, December.
  5. Lorenz, Edward, 1999. "Trust, Contract and Economic Cooperation," Cambridge Journal of Economics, Oxford University Press, vol. 23(3), pages 301-15, May.
  6. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
  8. Ken Binmore, 1994. "Game Theory and the Social Contract, Volume 1: Playing Fair," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262023636, August.
  9. George T. Abed & Hamid Reza Davoodi, 2000. "Corruption, Structural Reforms, and Economic Performance in the Transition Economies," IMF Working Papers 00/132, International Monetary Fund.
  10. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  11. Khan, M. Ali, 2002. "On trust as a commodity and on the grammar of trust," Journal of Banking & Finance, Elsevier, vol. 26(9), pages 1719-1766, September.
  12. Neil Bruce & Michael Waldman, 1986. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," UCLA Economics Working Papers 402, UCLA Department of Economics.
  13. Bergstrom, Theodore C, 1989. "A Fresh Look at the Rotten Kid Theorem--and Other Household Mysteries," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1138-59, October.
  14. Vito Tanzi, 1998. "Corruption Around the World; Causes, Consequences, Scope, and Cures," IMF Working Papers 98/63, International Monetary Fund.
  15. Ralph Chami, 2001. "What is Different About Family Businesses?," IMF Working Papers 01/70, International Monetary Fund.
  16. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
  17. La Porta, Rafael, et al, 1997. "Trust in Large Organizations," American Economic Review, American Economic Association, vol. 87(2), pages 333-38, May.
  18. Bernheim, B Douglas & Stark, Oded, 1988. "Altruism within the Family Reconsidered: Do Nice Guys Finish Last?," American Economic Review, American Economic Association, vol. 78(5), pages 1034-45, December.
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