Corporate Governance and the Problem of Privileged Personal Knowledge: Toward a Theory of Decentralized Governance
Law & Economics Center at George Mason University Scalia Law School Research Paper Series No. 22-018
34 Pages Posted: 28 Sep 2022 Last revised: 7 Oct 2022
Date Written: September 26, 2022
I advance an epistemology-based argument for the decentralization of the (corporate) governance economic function. Impetus for this argument comes from a recent increase in decentralized approaches, including bossless (flat) organizations and decentralized autonomous organizations (DAOs). However, while there is now evidence that it can work, a theoretical framework for ex-plaining how they work or when and why they may be preferable to traditional governance practices has been lacking. The essential argument of the paper is that the traditional agency-theoretic framework of governance is incomplete, not taking full account of important epistemic issues at the core of the agency problem. Specifically, what in philosophy has been called the ‘problem of privileged personal knowledge’ implies that governance by supervision must run into insuperable knowledge asymmetry problems that can enable misconduct. Following the classical Hayekian argument, such asymmetries can be addressed through decentralized. I elaborate this basic argument into a theoretical explanation and defense of governance decentralization, which can take various forms. Decentralizing governance would, of course, not be without its flaws, costs, and other drawbacks, which are also discussed.
Keywords: decentralization, corporate governance, agency theory, epistemology, Austrian economics
JEL Classification: B53, M12, L22, L51
Suggested Citation: Suggested Citation