Self Interest, Altruism, Incentives, and Agency Theory
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998; Journal Of Applied Corporate Finance, Summer 1994
Many people are suspicious of self-interest and incentives and oppose motivating humans through incentives. I analyze the meaning of incentives in the logic of choice and argue that it is inconceivable that purposeful actions are anything other than responses to incentives. Money is not always the best way to motivate people. But where money incentives are required, they are required precisely because people are motivated by things other than money.
Self-interest is consistent with altruistic motives. Agency problems, however, cannot be solved by instilling greater altruism in people because altruism, the concern for the well-being of others, does not make a person into a perfect agent who does the bidding of others.
I discuss the universal tendency of people to behave in non-rational ways. Though they are Resourceful, Evaluative Maximizers (REMMs) humans are imperfect because their brains are biologically structured so as to blind them from perceiving and correcting errors that cause psychic pain. The result is systematic, non-functional behavior.
I discuss a Pain Avoidance Model (PAM) that complements REMM by capturing the non-rational component of human behavior (the crux of human self-control problems). Recognizing these self- control problems leads to an expansion of agency theory since they are a second source of agency costs in addition to those generated by conflicts of interest between people.
See also the related paper by Jensen and Meckling The Nature of Man.
Number of Pages in PDF File: 17
JEL Classification: D23, D64, D83, G30, A13
Date posted: October 5, 1994