Delegation of Specification: An Agency Theory of Organizations
Revised version to be included in Barry M. Mitnick, ed., Theory of Agency (Cambridge University Press, Forthcoming)
48 Pages Posted: 6 Oct 2012
Date Written: April 2012
To date, much of the literature on institutional economics has relied on abstract metaphors based in exchange. Thus, Williamson introduced the fundamental insights surrounding his “transaction costs” model and discussed the governance of contracts in exchange relationships. Yet organizations are horizontal exchange systems only in metaphor; we also need to understand how vertical agency is directed -- how it is that people arrive with skills and learn what they need to know to make the enterprise successful. The distribution of higher-level decision patterns or residual claims do not fully explain the processes of specification of what organizational members actually do.
This paper rejects the view common in the agency literature that an organization should be seen as a "nexus of contracts." It develops an explicit theory of delegation of specification in which economizing principals prefer to hire imperfect agents as organizational members, allowing (and manipulating) third-party mechanisms in the organization to perfect or correct for agent shortcomings. In this way, collective or emergent features of organization settings are joined to dyadic concerns. A number of propositions follow. The logic allows us to link organization literatures now treated as disjunct.
Organizations are created -- exist -- as efficient means of directing (and correcting) the behavior of agents. Organizations exist to tell people what to do.
Keywords: agency theory, agency costs, principal, agent, delegation, contracts, incentives, policing, control, organization theory
JEL Classification: D21, D23, D73, D82, D83, L14, L22, L23, M54
Suggested Citation: Suggested Citation