An Experimental Test of Fairness Under Agency and Profit Constraints (With Notes on Implications for Corporate Governance)

37 Pages Posted: 10 Feb 2004  

Kent Greenfield

Boston College Law School

Peter Kostant

New York Law School

Date Written: March 3, 2003

Abstract

Building on the scholarship using ultimatum game experiments to explore the presence of fairness norms in bargaining exchanges, the authors test whether such norms are affected by agency relationships alone or agency relationships linked with a duty to maximize returns to the principal. The findings are dramatic. The study, the first of its kind, indicates a significant decrease in a concern for fairness (defined as a willingness to share a pot of money) when a participant in a bargaining transaction acts as an agent for another and owes a duty to maximize the return to the principal. We find no such decrease when the agent is acting without the explicit duty to maximize return to the principal. These findings were made in the context of modified ultimatum game experiments conducted among first year law students. While recognizing the limitations of the experiments as well as the risks of extrapolating from experiment to actual practice, our findings suggest that existing corporate law - which requires directors to act as agents of shareholders and to maximize return to those shareholders - may provide incentives to directors to act unfairly toward non-shareholder stakeholders. These incentives, which currently exist in the law and norms governing corporate governance may actually encourage inefficient results that may reduce payoffs to corporations.

Keywords: corporate governance, corporate law, ultimatum game, law and economics, behavioral economics, fairness

Suggested Citation

Greenfield, Kent and Kostant, Peter, An Experimental Test of Fairness Under Agency and Profit Constraints (With Notes on Implications for Corporate Governance) (March 3, 2003). George Washington Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=385262

Kent Greenfield (Contact Author)

Boston College Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States
617-552-3167 (Phone)
617-552-4098 (Fax)

Peter Kostant

New York Law School ( email )

185 West Broadway
New York, NY 10013
United States

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