Agency Problems and the Fate of Capitalism
45 Pages Posted: 25 Oct 2010 Last revised: 22 Jan 2022
There are 2 versions of this paper
Agency Problems and the Fate of Capitalism
Date Written: October 2010
Abstract
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.
Suggested Citation: Suggested Citation