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To Trust or to Monitor: A Dynamic Analysis

Author

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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.

Suggested Citation

  • Fali Huang, 2007. "To Trust or to Monitor: A Dynamic Analysis," Working Papers 11-2007, Singapore Management University, School of Economics.
  • Handle: RePEc:siu:wpaper:11-2007
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    File URL: https://mercury.smu.edu.sg/rsrchpubupload/10331/TrustGovernance20070924ET.pdf
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    Cited by:

    1. Auriol, Emmanuelle & Brilon, Stefanie, 2014. "Anti-social behavior in profit and nonprofit organizations," Journal of Public Economics, Elsevier, vol. 117(C), pages 149-161.
    2. Bruno S. Frey, 2006. "Evaluitis � Eine Neue Krankheit," IEW - Working Papers 293, Institute for Empirical Research in Economics - University of Zurich.
    3. Fali Huang & Peter Cappelli, 2006. "Employee Screening: Theory and Evidence," NBER Working Papers 12071, National Bureau of Economic Research, Inc.
    4. Fali Huang, 2007. "Building Social Trust: A Human-Capital Approach," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(4), pages 552-573, December.
    5. Bruno S. Frey, 2006. "Evaluitis ? Eine neue Krankheit," CREMA Working Paper Series 2006-18, Center for Research in Economics, Management and the Arts (CREMA).

    More about this item

    Keywords

    Monitoring ; Trustworthiness ; Trust ; Screening ; Economic Governance;

    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 - - Personnel Economics
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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