Agency and Anxiety

30 Pages Posted: 26 Jan 2010

See all articles by Michael T. Rauh

Michael T. Rauh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Giulio Seccia

University of Southampton - Division of Economics

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Abstract

In this paper, we introduce the psychological concept of anxiety into agency theory. An important benchmark in the anxiety literature is the inverted-U hypothesis, which states that an increase in anxiety improves performance when anxiety is low, but reduces it when anxiety is high. We show that the inverted-U hypothesis is consistent with evidence that high-powered incentives can reduce the agent's optimal effort and expected performance. In equilibrium, however, a profit-maximizing principal never offers such counterproductive incentives. We also show that the inverted-U hypothesis can explain empirical anomalies related to monitoring, the informativeness principle, and the risk–reward tradeoff.

Suggested Citation

Rauh, Michael T. and Seccia, Giulio, Agency and Anxiety. Journal of Economics & Management Strategy, Vol. 19, Issue 1, pp. 87-116, Spring 2010. Available at SSRN: https://ssrn.com/abstract=1542317 or http://dx.doi.org/10.1111/j.1530-9134.2009.00246.x

Michael T. Rauh (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Giulio Seccia

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 23 8059 3529 (Phone)
+44 23 8059 3858 (Fax)

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