Organizations and Markets

Behavioral Agency Theory

28 November 2012 at 9:12 am Nicolai Foss 1 comment

| Nicolai Foss |

Kathleen Eisenhardt’s 1989 Academy of Management Review paper is likely still the first, but hopefully not the last, exposure many management scholars have to agency theory. The paper is somewhat imprecise, and it shows its age, but as an introduction to the theory, one can do worse. However, much has in fact happened in agency theory since 1989 in terms of extensions and refinements of the theory, and also in terms of critical reactions, some of which have been partly aligned with the theory.

In particular, (some) economists and (more) management scholars (e.g., Wiseman and Gomez-Mejia) have tried to bring behavioral perspectives into agency theory. In a new paper (forthcoming in the Journal of Management), Alexander Pepper of the LSE and Julie Gore of the University of Surrey provide a useful overview of “behavioral agency theory,” somewhat in the style of Eisenhardt’s earlier review (i.e., with propositions that summarize the earlier literature). They include, for example, prospect theory, work on inequity aversion and even self-determination theory under the behavioral hat, and thus bring both cognitive and motivational issues into the orbit of behavioral agency theory.

A few mildly critical comments.

• There is no claim in the paper that the various behavioral ideas are consistent and “add up,” but this is something that should perhaps have been discussed. Standard theory may make extreme assumptions but it is a highly consistent and neat theory. In contrast, behavioral agency theory is a bouillabaise of very different ingredients that are linked to the standard theory in a somewhat ad hoc manner.
• The authors position and motivate the paper in terms of gaining more insight into executive compensation, but of course the scope of behavioral agency theory is much broader.
• The authors, like Eisenhardt, repeats Michael Jensen’s distinction between “positive agency theory” and “principal-agent theory,” which makes as little sense today as it did in 1983 ;-)

Still, Pepper and Gore’s paper is definitely worth a read and I highly recommend it.

Entry filed under: - Foss -, Management Theory, Recommended Reading, Theory of the Firm.