Abstract
This study investigates the implications of integrity—interpreted as the alignment of one’s words and deeds—within the agency paradigm by explicitly allowing for unprincipled behavior (agent misconduct) in addition to conflicts of interest resulting from the separation of ownership and control. Under adverse selection, contracts that screen for agents who exhibit integrity characterize a previously unidentified symbiosis between the penalty for unprincipled behavior and high-powered incentive pay. The resulting contracts and penalties are interpreted in light of the Sarbanes–Oxley and Dodd–Frank Acts.
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Notes
This is because an agent’s preferences over a given bonus, B j , or action, a j , are the same regardless of whether the agent is an N-type or a U-type. By contrast, when an agent exhibits social preference over B j and/or a j it is possible that the agent with social preferences receives a lower B j for a higher a j . Such a possibility exists in Rabin (1993), Vanberg (2008), Eillingsen and Johannesson (2004), Sacconi and Fallo (2010) and Arce (2013).
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This paper has benefitted greatly from the suggestions of two anonymous referees.
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Arce, D.G. Integrity, unprincipled agents and corporate governance reform. Eur J Law Econ 39, 539–551 (2015). https://doi.org/10.1007/s10657-014-9478-4
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DOI: https://doi.org/10.1007/s10657-014-9478-4