Putting a Realistic Theory of Mind into Agency Theory: Implications for Reward Design and Management in Principal‐Agent Relations

16 Pages Posted: 12 Apr 2014

See all articles by Nicolai J. Foss

Nicolai J. Foss

Copenhagen Business School - Department of Strategy and Innovation

Diego Stea

Copenhagen Business School - Department of Strategic Management and Globalization

Date Written: Spring 2014

Abstract

Agency theory is one of the most important foundational theories in management research, but it rests on contestable cognitive assumptions. Specifically, the principal is assumed to hold a perfect (correct) theory regarding some of the content of the agent's mind, while he is entirely ignorant concerning other such content. More realistically, individuals have some limited access to the minds of others. We explore the implications for classical agency theory of realistic assumptions regarding the human potential for interpersonal sensemaking. We discuss implications for the design and management of rewards, and trace implications for value creation in principal‐agent relations.

Keywords: organization, cognition and learning, incentives, human resources

Suggested Citation

Foss, Nicolai J. and Stea, Diego, Putting a Realistic Theory of Mind into Agency Theory: Implications for Reward Design and Management in Principal‐Agent Relations (Spring 2014). European Management Review, Vol. 11, Issue 1, pp. 101-116, 2014, Available at SSRN: https://ssrn.com/abstract=2424058 or http://dx.doi.org/10.1111/emre.12026

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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