Search

Philanthropy, and particularly ensuring that one’ s giving is effective, can require substantial time and effort. One way to reduce these costs could be to encourage delegation of giving decisions to better-informed others. At the same time, because it involves a loss of agency, delegating these decisions may reduce one’s charitable impulse. Unfortunately, the importance of agency in charitable decisions remains largely unexplored. In this paper we shed light on this issue using a laboratory experiment with real donations in which we systematically vary the monetary and agency costs associated with making informed and effective giving decisions,. Our main finding is that agency seems to play a small role in promoting giving. In particular, people do not reduce donations when giving decisions are made by algorithms that guarantee efficient recipients but limit donors’ control over giving recipients. Moreover, we find that participating in giving groups - a weaker form of delegated giving -is also effective in that they are appealing to donors who would not otherwise make informed donations, and thus improves overall effective giving. Our results suggest that one path to promoting effective giving may be to create institutions that facilitate delegated generosity.

A team composed of a principal and an agent needs to choose a project to run, while they may have different preferences regarding the project. The agent has various types of bias in terms of project selection, and he can make an effort in acquiring the information regarding the promise of projects. The principal can either keep the decision-making authority of choosing which project to run, or delegate it to the agent. We find that the optimal effort level under the principal's authority is at its highest when the agent is the most biased, while under the agent's authority it is also at its highest when the agent has an intermediate bias. Therefore, the principal should keep the authority and communicate with the agent when the agent is relatively biased, and delegate the authority when the agent has an intermediate bias. However, from the team's point of view where both players’ payoffs are taken into account, the principal may delegate too much authority to a relatively unbiased agent, and too little authority to a relatively biased agent.

We investigate the impact of organizational religiosity on the earnings quality of listed banks in the Middle East and North Africa region. We analyze Islamic banking institutions, which operate within strict religious norms and extended accountability constraints, and compare them with their conventional counterparts during 2008–2013. We find that Islamic banks are less likely to manage earnings and that they adopt more conservative accounting policies. Based on these findings, we argue that religious norms and moral accountability constraints in these organizations have a significant impact on financial reporting quality and agency costs, which have implications for both regulators and market participants.

It is widely accepted in social psychology that the need to maintain and enhance self-esteem is a fundamental human motive. We incorporate this factor into an otherwise ordinary principal-agent framework and examine its impact on the optimal incentive scheme and the agent's behavior, especially focusing on a form of intrapersonal strategy known as self-handicapping. Incorporating self-esteem concerns into a contracting situation yields an implication that goes against the conventional wisdom: the standard tradeoff between risk and incentives may break down (i.e., more uncertainty reduces the agency cost) in the presence of self-esteem concerns because uncertainty mitigates the need for self-handicapping. This result provides a potential reason for why we do not empirically observe this tradeoff in a robust manner. We characterize an intuitive condition for this anomaly to arise and present a set of testable implications. The present framework also reveals why and how team production can be more profitable, providing an explanation for the increasing popularity of team production. Finally, this simple logic is applied to draw additional implications for hidden costs of external enforcers such as evaluation, monitoring and direct control over workers, which are discussed extensively in social psychology.

We consider a model of team production in which the principal observes only the team output, but agents can monitor one another (at a cost) and provide reports to the principal. We consider the problem faced by a principal who is prevented from penalizing an agent without evidence showing that the agent failed to complete his assigned actions. We show the first-best (high effort but no monitoring) can be achieved, but only if the principal assigns second-best actions. The principal requires monitoring, but agents do not monitor, and as long as output is high, the principal does not penalize agents who fail to monitor. If the principal has the responsibility for monitoring, the first-best outcome cannot be achieved, thus we identify an incentive for delegated monitoring even when agents have no informational advantage.

In many cases, the cost of hiring an agent to acquire information is lower than the cost for the principal to perform that task. However, because of a difference in preferences between the principal and the agent, the principal often cannot fully utilize the agent’s expertise. This paper considers the cost of motivating the agent to acquire information and inducing him to report truthfully. The larger the private benefit, the greater is the cost of eliciting true information. At the same time, a private benefit may reduce the cost of motivating information acquisition. Thus, there are cases in which an agent with a different preference is desirable.

In corporate governance literature, it is argued that large outside investors are able to reduce agency costs by monitoring and disciplining managers more effectively than a large number of small dispersed investors. This paper separates large investors into private foreign institutional investors and government-owned local financial institutions in the context of a developing economy, and arguing that the latter have lower incentives in monitoring managers. The empirical results show that increasing presence of foreign institutional investors has a positive effect on corporate performance in terms of profitability. Firms that depend on government financial institutions for external finance show decline in performance.

We develop a dynamic model that incorporates the insights of both the agency cost and asset specificity literature about corporate finance. In general, we find that neither can be ignored, and that the optimal capital structure minimizes agency cost and asset specificity considerations. A key finding is that the conditions most favorable for reducing transaction costs due to asset specificity are the same as those for reducing the agency costs of debt. Empirically, we find that agency costs and asset specificity are significant determinants of a firm’s capital structure in the transportation equipment and the printing and publishing industries.

The organizational form of franchising has been shown to yield higher profits and faster growth through reducing agency costs. Why then does anyone not franchise? In this paper I argue that the diffuse residual claims of the franchise system reduce overall system quality, and that this problem is inherent in the nature of franchising. The theory is tested by examining evidence from both the restaurant and the hotel industries, including chains that franchise and ones that own all of their units. In both industries, quality is negatively related to the percent franchising in the chain, controlling for size, growth in units, monitoring costs, market segment, ownership structure, multi-chain operation, and price. The results suggest that the franchise contract increases free-riding and decreases quality in decentralized service chains, and that quality is not contractible in this setting.

This paper develops a generalized double-sided moral hazard model of contract choice in agricultural production, with mutual monitoring of each other by the landlord and the tiller, who generally have different levels of farming efficiency and are risk-averse. Using this model, we formally prove that the optimal contract maximizes the output net of the risk-bearing and agency costs, of both the parties and carry out a simulation exercise which helps explain many of the tenancy-related issues. The difference in the farming efficiency of the two sides, often ignored in previous analysis, turns out to be the principal determinant of the contract offered to a tiller.

In this paper we stress the informal institutions that have evolved alongside formal contracts to mitigate agency costs. The timing of payment is a pervasive example of such an informal institution. The basic result of our analysis is that ex post payment is a rational institutional choice of buyers and sellers designed to control the significant transactions costs inherent in certain types of exchanges characterized by interpersonal differences in information. Moreover, the selection of a payment scheme allocates the roles of principal and agent, with the party having the greater likelihood of cheating becoming the agent.

Two unique characteristics of modern Japanese labor management practice are the prevalence of lifetime employment and of biannual bonuses. In contrast these practices are relatively infrequent in the United States. Many of the explanations offered so far attribute the difference to cultural, and/or institutional differences in the two countries. In this paper, we present a different point of view; one that provides an economic rationale for various practices. The model developed is based upon the framework of the principal-agent relationship. The principal (employer) offers to the agent (employee) a contract (which specifies contract length, wage rate and profit sharing schedule) so as to maximize the expected value of a stream of future profits. The agent in turn accepts this contract if and only if he can make himself better off in doing so. If the appropriate level of effort can be specified and enforced by the principal, there is no ‘agency problem’. The resulting outcome is said to be ‘first best’. On the other hand, in many situations, the principal is not able to enforce the effort level (due to, for example, monitoring costs or lack of observability). Thus, in the presence of this agency problem, the appropriate level of effort is chosen, for any given contract, by the agent in such a way that his expected utility is maximized. The optimal contracts in this framework are said to be ‘second best’. The main focus in the paper is on the second best case. We find that the optimal contracts depend upon various factors such as labor productivity, disutility of effort, risk aversion, alternate market opportunity, transaction cost, demand conditions and discount rates. By using numerical examples obtained by dynamic programming, we illustrate that any form of employment policy can be optimal for the appropriate situations. In addition we estimate the agency cost (or the incentive gap) between the first best and second best solutions.