Publication Type

Working Paper

Publication Date

8-2007

Abstract

In a principal–agent framework, principals can mitigate moral hazard prob- lems 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 trust- worthiness 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 choos- ing governance methods tend to have higher monitoring intensities and lower trust. These results are consistent with the empirical evidence.

Keywords

Monitoring Trustworthiness Trust Screening Economic Governance

Discipline

Business Law, Public Responsibility, and Ethics | Political Economy

Research Areas

Applied Microeconomics

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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