Building a Pathway to Cooperation: Negotiation and Social Exchange between Principal and Agent

Posted: 10 Oct 2004 Last revised: 20 Jan 2015

See all articles by William P. Bottom

William P. Bottom

Washington University in St. Louis - John M. Olin Business School

James A. Holloway

Washington University

Gary J. Miller

Washington University in St. Louis - Department of Political Science

Alexandra Mislin

American University

Andrew B. Whitford

University of Georgia - Department of Public Administration and Policy

Date Written: 2006

Abstract

The principal-agent problem is fundamental to organization design. A principal must negotiate an incentive contract to motivate a more risk averse agent to undertake costly actions that cannot be observed. In rational choice theory, the problem is solved through an inefficient shifting of risk from principal to agent. However, neither field studies nor prior experiments have observed the types of contracts nor the agent response predicted by this theory. Two experiments were conducted to test a modular social cognition theory explanation for this discrepancy. According to this alternative to rational choice theory, individuals have evolved specialized cognitive capabilities for dealing with exchange relations. These very human capabilities do not operate by the same logic as rational choice. Both a study of individual agent decisions to a series of hypothesized contracts in experiment one and the interactive bargaining of experiment two yielded results consistent with the modular theory. The logic of social exchange is quite different from the logic of individual choice or game theory. Implications for theory and practice are considered.

Keywords: Negotiation, Gift Exchange, Principal Agent Theory

JEL Classification: C7

Suggested Citation

Bottom, William P. and Holloway, James A. and Miller, Gary J. and Mislin, Alexandra and Whitford, Andrew B., Building a Pathway to Cooperation: Negotiation and Social Exchange between Principal and Agent (2006). Administrative Science Quarterly. 51(1):29-58. . Available at SSRN: https://ssrn.com/abstract=602074 or http://dx.doi.org/10.2139/ssrn.602074

William P. Bottom (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6351 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/bottom.html

James A. Holloway

Washington University ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4299 (Phone)
314-935-6359 (Fax)

Gary J. Miller

Washington University in St. Louis - Department of Political Science ( email )

One Brookings Drive
Campus Box 1063
St. Louis, MO 63130
United States
314-935-5874 (Phone)
314-935-5856 (Fax)

Alexandra Mislin

American University ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States

Andrew B. Whitford

University of Georgia - Department of Public Administration and Policy ( email )

Athens, GA 30602
United States
706-542-2898 (Phone)
706-583-0610 (Fax)

HOME PAGE: http://andrewwhitford.com

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