Generalized Agency Problems

27 Pages Posted: 20 Nov 2009

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

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Date Written: May 16, 2009

Abstract

Agency problems in economics virtually always entail self-interested agency exhibiting “insufficient” loyalty to principal. Social psychology also has a literature, mainly derived from work by Stanley Milgram, on issues of agency, but this emphasizes excessive loyalty – people undergoing a so-called “agentic shift” and forsaking rationality for loyalty to a legitimate principal, as when “loyal” soldiers obey orders to commit atrocities. This literature posit that individuals experience a deep inner satisfaction from acts of loyalty - essentially a “utility of loyalty” – and that this both buttresses institutions organized as hierarchies and explains much human misery. Agency problems of excessive loyalty, as when boards kowtow to errant CEOs and controlling shareholders, may be as economically important in corporate finance as the more familiar problems of insufficient loyalty of corporate insiders to shareholders. Overt conflict between rival authorities is shown to reverse the “agentic shift” – justifying institutions that formalize argumentation such as the adversary system in Common Law courts; the Official Opposition in Westminster democracies; discussants and referees in academia; and independent directors, non-executive chairs, and proxy contests in corporate governance.

Keywords: Behavioral Finance, Behavioral Economics, Neuroeconomics, Agency Problems, Agentic Shift,Loyalty, Institutional Evolution, Dissenting Opinion

JEL Classification: G3, G34, K22, L21, D21, D70

Suggested Citation

Morck, Randall K., Generalized Agency Problems (May 16, 2009). Available at SSRN: https://ssrn.com/abstract=1508763 or http://dx.doi.org/10.2139/ssrn.1508763

Randall K. Morck (Contact Author)

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