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Agency Theory and Stochastic Dominance

Published online by Cambridge University Press:  06 April 2009

John S. Hughes
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Extract

Recently, agency theory has become popular as a means of explaining the structure of contracts between various classes of economic agents. Oftentimes the contracts of interest represent sharing rules for the payoffs that result from some production activity. In the usual two-party model of the contracting problem, one party designated the principal delegates authority for decisions affecting production to another party designated the agent. Typically, the assumptions made about the consequences of the agent's actions are that they are associated with effort on the part of the agent for which the agent (but not the principal) has disutility, and that greater effort will result in higher payoffs from production in every state of nature. Moral hazard is then introduced by assuming that the principal is unable to observe the agent's effort, or to infer what effort the agent applied through an ex post observation of the payoff that results.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 17 , Issue 3 , September 1982 , pp. 341 - 361
Copyright
Copyright © School of Business Administration, University of Washington 1982

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