Choosing Constraints as a Third Solution to Agency

27 Pages Posted: 31 Oct 2004

See all articles by Steven C. Michael

Steven C. Michael

University of Illinois at Urbana-Champaign - Department of Business Administration

John A. Pearce

Villanova University

Abstract

The standard solutions to agency, incentive contracting and monitoring, are degraded by the frequency and the duration of the decisions affected. Decisions of low frequency and long duration are not effectively controlled by either monitoring or incentive contracting. For decisions of low frequency and long duration, constraining the firm's choices significantly reduces agency. Applying the theory, guidelines for choosing constraints are suggested, and propositions advanced. As one application, the mission statement is considered as a vehicle for embedding constraints. The theory is also investigated by examining existing recommendations for both the content and process of mission statements.

Suggested Citation

Michael, Steven C. and Pearce, John A., Choosing Constraints as a Third Solution to Agency. Available at SSRN: https://ssrn.com/abstract=610446

Steven C. Michael (Contact Author)

University of Illinois at Urbana-Champaign - Department of Business Administration ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-265-0702 (Phone)

John A. Pearce

Villanova University ( email )

Villanova, PA 19085
United States

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