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.
Monitoring Trustworthiness Trust Screening Economic Governance
Business Law, Public Responsibility, and Ethics | Political Economy
To Trust or to Monitor: A Dynamic Analysis. (2007). Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1029
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