Ethics and Agency Theory: Incorporating a Standard for Effort and an Ethically Sensitive Agent

Syracuse University Working Paper

47 Pages Posted: 8 Jan 2003

See all articles by Douglas E. Stevens

Douglas E. Stevens

Georgia State University - Robinson College of Business

Alex Thevaranjan

Syracuse University - School of Management

Date Written: November 25, 2003

Abstract

We study the implications of introducing ethics into the traditional principal-agent model. In our model, the principal specifies a standard for effort at the time of contracting and the agent suffers a utility loss if he chooses not to provide the standard after agreeing to the contract. The magnitude of the loss depends upon the agent's ethical sensitivity. We demonstrate the emergence of an optimal flat salary contract. We then examine the interplay between ethical sensitivity and firm productivity in determining the optimal salary contact, and contrast it with the traditional incentive solution. Our results are intuitive and help explain a variety of contracting behavior that is inconsistent with traditional agency predictions.

Keywords: ethics, agency theory, productivity, flat salary contracts,

JEL Classification: A31, D82, M14

Suggested Citation

Stevens, Douglas E. and Thevaranjan, Alex, Ethics and Agency Theory: Incorporating a Standard for Effort and an Ethically Sensitive Agent (November 25, 2003). Syracuse University Working Paper. Available at SSRN: https://ssrn.com/abstract=342221 or http://dx.doi.org/10.2139/ssrn.342221

Douglas E. Stevens (Contact Author)

Georgia State University - Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7212 (Phone)
404-413-7203 (Fax)

HOME PAGE: http://robinson.gsu.edu/profile/douglas-e-stevens/

Alex Thevaranjan

Syracuse University - School of Management ( email )

Department of Accounting
900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States
315-443-3355 (Phone)
315-443-5457 (Fax)

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