MORAL MARKETS: THE CRITICAL ROLE OF VALUES IN THE ECONOMY, Paul J. Zak, ed., Princeton University Press, 2007
28 Pages Posted: 13 Sep 2006
Since the mid-1970's neoclassical agency theory has dominated business school thinking and teaching in dealing with the nature of managerial behavior. Agency theory assumes contracts are incomplete and non-enforceable in a court of law, information is asymmetric, and managers are selfish maximizers of personal material gain. The theory suggests that the firm's board of directors devise monetary incentives that lead managers to maximize the firm's profit. Agency theory creates a corporate atmosphere that legitimizes a culture of greed in which managers are encouraged to care about nothing but personal gain, and in which such human character virtues as honesty and decency are deployed only contingently in the interests of personal material reward. However, a wide range of experiments based on behavioral game theory contradict traditional agency theory. In the face of contractual incompleteness, a degree of trust and reciprocity generally gives better results for contracting parties than explicit incentives, and many parties place considerable value on the character virtues for their own sake, and are willing to sacrifice material gain to maintain honesty and trustworthiness. We suggest that a corporate culture based on character virtues, together with owner-manager relationships predicated in part on reciprocity and mutual regard, could improve both the moral character of business and the profitability of corporate enterprise.
Suggested Citation: Suggested Citation
Gintis, Herbert and Khurana, Rakesh, Corporate Honesty and Business Education: A Behavior Model. Free Enterprise: Values in Action Conference Series, 2005-2006; MORAL MARKETS: THE CRITICAL ROLE OF VALUES IN THE ECONOMY, Paul J. Zak, ed., Princeton University Press, 2007. Available at SSRN: https://ssrn.com/abstract=929173