Ex-Ante vs. Ex-Post Governance: A Behavioral Perspective

Abstract

Problems resulting from the delegation of competencies from one actor to another are at the heart of any governance discussion. While the conventional agency view stronger emphasizes that such problems can be solved ex-post by monitoring and control strategies, the contract view proposes to tackle said problems ex-ante through alignment of the agent's incentives to those of the principal by e.g. incentive contracts. No final conclusion has yet been reached about which approach is better suited to deal with the agency problem. In this paper, we introduce a behavioral perspective to this discussion. We will spotlight that the ex-post strategies are behaviorally dysfunctional. The effect of self-serving and hindsight tendencies can hardly be overcome. Ex-ante strategies, in contrast, suffer from problems of incentive design. However, proper incentive design can account for behavioral decision-patterns. On this ground we argue that incentive contracting appears to be superior to monitoring approaches to solve the principal-agent conflict. We propose a counterintuitive shift of certain dimensions of rule-making competencies: from public to private ordering for monitoring strategies and from private to public ordering for incentive contracting.

Keywords: Corporate Governance, Agency Problem, Monitoring, Incentive Contracts, Behavioral Economics

JEL Classification: D03, G34, K22, K11