Agency Problems and the Fate of Capitalism
44 Pages Posted: 17 Oct 2010 Last revised: 30 Jan 2013
Date Written: October 16, 2010
Economics has firms maximizing value and people maximizing utility, but firms are run by people. Agency theory concerns the mitigation of this internal contradiction in capitalism. Firms need charters, regulations and laws to restrain those entrusted with their governance, just as economies need constitutions and independent judiciaries to restrain those entrusted with government. Agency problems distort capital allocation if corporate insiders are inefficiently selected or incentivized, and this hampers economic growth absent a legal system with appropriate constraints. However, political economy problems and agency problems in corporations may reinforce each other, compromising the quality of both corporate governance and government.
Keywords: Principal Agent Problem, Corporate Governance, Economic History, Political Economy, Austrian School
JEL Classification: P1, B53, G28, G34, N20, P12
Suggested Citation: Suggested Citation