Compensation Contracts: Do Agency Theory Assumptions Predict Negotiated Agreements?

Abstract

This study examined how the ability to monitor an agent's actions and environmental munificence affect compensation contracts in principal-agent dyads. In a laboratory experiment, we tested predictions based on both assumptions grounded in agency theory and an alternative perspective. In simulated munificent environments, inability to monitor fostered contracts that were contingent on outcomes, and agents received larger relative shares of dyadic earnings. In environments characterized by scarcity, the reverse was true. Our findings suggest that the agency model applies under conditions of munificence but fails under scarcity.