Epistemics at Work: The Theory of Mind in Principal-Agent Relations

28 Pages Posted: 25 Feb 2014

See all articles by Stefan Linder

Stefan Linder

ESSEC Business School

Nicolai J. Foss

Copenhagen Business School - Department of Strategy and Innovation

Diego Stea

Copenhagen Business School - Department of Strategic Management and Globalization

Date Written: February 24, 2014

Abstract

Agency theory studies the impact of and remedies to asymmetrically distributed information in principal-agent relations. Yet, it does so in a surprisingly binary manner: it assumes the principal to be perfectly knowledgeable of some pieces of information (such as the agent’s risk aversion), while others (such as the agent’s true effort exerted) are considered to be perfectly private information of the agent. Agency theory thus makes very asymmetrical assumptions about the knowledge of principals and agents, largely neglecting the human capacity for interpersonal sense-making. This chapter explores the implications of instilling agency theory with a more realistic account of the human capacity to read other people’s desires, intentions, knowledge, and beliefs — that is, to have a theory of someone else’s mind.

Keywords: Agency theory, principal-agent relations, epistemic assumptions, theory of mind

JEL Classification: D23, D82, D86, M5

Suggested Citation

Linder, Stefan and Foss, Nicolai J. and Stea, Diego, Epistemics at Work: The Theory of Mind in Principal-Agent Relations (February 24, 2014). Available at SSRN: https://ssrn.com/abstract=2400928 or http://dx.doi.org/10.2139/ssrn.2400928

Stefan Linder

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

HOME PAGE: http://www.essec.edu

Nicolai J. Foss (Contact Author)

Copenhagen Business School - Department of Strategy and Innovation ( email )

Kilen
Frederiksberg, 2000
Denmark

Diego Stea

Copenhagen Business School - Department of Strategic Management and Globalization ( email )

Porcelænshaven 24
Frederiksberg, 2000
Denmark

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