Agency theory and social interactions at work

Abstract

The main aim of this paper is to show that even when integrating the findings of behavioral economics, agency theory’s conception of interactions at work does not actually account for cooperative behavior. The paper draws on the distinction between the concepts of individual and person to critically examine this conception and show that, while work is mostly organized on the assumption that workers are self-interested individuals, management rhetoric addresses workers as persons in an attempt to prompt their cooperation and personal commitment. This managerial paradox may partly be due to the prevalent influence of agency theory’s prescriptions and has been contributing to a severe deterioration of the quality of working life. But it also indicates that agency theory has to confront serious theoretical and prescriptive dilemmas.

Keywords:

• Individuals vs. persons
• agency theory
• cooperation
• management paradoxes
• social interactions at work

JEL classification:

• A13
• D23
• J28

Acknowledgements

This paper greatly benefited from the project ‘L’entreprise, formes de la propriété et responsabilités sociales’ and in particular from the stimulating and helpful comments of Olivier Favereau, Baudoin Roger and other project participants. Financial support from the Collège des Bernardins is gratefully acknowledged. The author wishes to thank the anonymous referees for their insightful and very helpful comments and suggestions. All remaining errors are our own.

Notes

¹ Jensen and Meckling (1976) is the third most cited paper in economics of those published since 1970; Michael Jensen is the fourth most cited author (Kim et al. 2006).

² Hereafter ‘agency theory’.

³ Observational studies reveal that most workers spend the majority of their time interacting with peers rather than with supervisors and subordinates (Le Gall 2011). This illustrates the crucial role of horizontal interactions for the functioning of firms.

⁴ We thank an anonymous referee for calling our attention to this literature.

⁵ In a footnote though, Holmstrom (1999: 89, footnote 14) notes that ‘the evidence suggests that the nature of external contracting is quite different from internal contracting’.

⁶ This raises a crucial issue: the fact that workers as persons need to nurture good relationships and are prone to behave cooperatively is often used by firms to manipulate them and perpetuate oppression in the name of overcoming it (Alvesson and Willmont 1992). Our intent is obviously to argue that firms must acknowledge the social and moral abilities of workers without using them to further exploit workers.

⁷ The trends referred below are over-simplified. Actual practices are much more nuanced, depending also on the kind of industry and occupation. For example, pay-for-performance schemes are very frequent for executives but rare for non-executives (Larkin et al. 2012). By contrast, wage inequalities increased almost everywhere.

⁸ According to a French survey, 87% of employers believe that the individualization of wages motivates employees, but 40% declare that the rivalries it creates destroy the collective spirit.

⁹ It must be noted that workers may be committed to their work but not to the organization in which they work (Cushen and Thompson 2012), which further amplifies the paradoxical situation.

¹⁰ Zajac and Westphal (2004) studied the processes in which agency theory’s prescriptions translate in financial market behavior. Other studies of this kind are much needed.

¹¹ In many countries, several voice mechanisms are formally available that are actually not or rarely used – given the present broad economic context, changes in labor law alone do not suffice.