The Principal's Other Problems: Honest Incompetence and the Specification of Objectives

Abstract

In this article an extension of agency theory based on problems that arise in agency relationships, even when agents are assumed to be honest and dutiful, is put forward. With one exception, these assumptions lead to essentially the same predictions as in standard agency theory, suggesting that effects commonly attributed to self-seeking may be better understood as more fundamental effects of the agency relationship itself. This analysis raises a number of previously unexplored research questions concerning the nature of managerial agency relationships.