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Trust in Agency

Authors


  • I thank Daniel Spulber for his advice and encouragement throughout the project as well as Sandeep Baliga, Morton Kamien, Brian Uzzi, Nabil Al-Najjar, Scott Davis, Teresa Garcia Marco, Peter Klibanoff, Vernon Noronha, Emre Ozdenoren, Vicente Salas Fumás, Joel Sandonís, and Ana Sotelo, seminar participants at Universidad Carlos III, Universidad Católica de Chile, Carnegie Mellon, University of California Santa Cruz, INSEAD, Georgetown, New York University, Harvard Business School, University of Texas–Austin, and Yale School of Management. I am grateful to the Ministerio de Ciencia y Tecnología (programa Ramón y Cajal) and Fundación Banco Bilbao Vizcaya Argentaria for financial support.

Abstract

Existing models of the principal–agent relationship assume the agent works only under extrinsic incentives. However, many observed agency contracts take the form of a fixed payment. For such contracts to work, the principal must trust the agent to work in the absence of incentives. I show that agency fosters the advent of intrinsic motivation and trustworthy behavior. Three distinct motivational schemes are analyzed: norms, ethical standards, and altruism. I identify conditions under which these mechanisms arise and show how they promote trust. The analysis alters several important predictions of conventional models: (1) Better outcomes may ensue in highly uncertain environments; (2) the principal is better off the more the agent is risk averse; and (3) larger equilibrium extrinsic incentives need not be associated with larger effort or larger total surplus.

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