Publication Type
Working Paper
Version
publishedVersion
Publication Date
8-2007
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.
Keywords
Monitoring, Trustworthiness, Trust, Screening, Economic Governance
Discipline
Behavioral Economics | Business Law, Public Responsibility, and Ethics
Research Areas
Applied Microeconomics
First Page
1
Last Page
21
Publisher
SMU Economics and Statistics Working Paper Series, No. 11-2007
City or Country
Singapore
Citation
HUANG, Fali.
To Trust or to Monitor: A Dynamic Analysis. (2007). 1-21.
Available at: https://ink.library.smu.edu.sg/soe_research/1029
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.