Fiduciary Law and the Preservation of Trust in Business Relationships

This chapter explores the role of mandatory fiduciary obligations in preserving trust between business parties. Because contracts are inevitably incomplete, after investment there is always a risk of opportunism. While the parties could try to draft a more detailed agreement prohibiting various forms of opportunism, the very act of haggling over such protections may signal distrust, eliciting costly reactions (defensive measures/hedging/lack of intrinsic motivation) in the counterparty. In the absence of fiduciary protections, a vulnerable party may decide to forgo important protections against opportunism, not because such protections are suboptimal or hard to specify ex ante but because bargaining for them would signal distrust. By contrast, state-imposed fiduciary obligations remove the invocation of distrust by either party to the agreement. We further observe that while fiduciary protections can help prevent distrust among a small number of contracting parties, fiduciary protections may prove inadequate in some settings, especially in addressing horizontal conflicts between beneficiaries. The chapter concludes by observing that the limits of contract and fiduciary law leave a residual zone of vulnerability in which trust and other mechanisms of risk reduction play a significant role

Fiduciary Law and the Preservation of Trust in Business Relationships

This chapter explores the role of mandatory fiduciary obligations in preserving trust between business parties. Because contracts are inevitably incomplete, after investment there is always a risk of opportunism. While the parties could try to draft a more detailed agreement prohibiting various forms of opportunism, the very act of haggling over such protections may signal distrust, eliciting costly reactions (defensive measures/hedging/lack of intrinsic motivation) in the counterparty. In the absence of fiduciary protections, a vulnerable party may decide to forgo important protections against opportunism, not because such protections are suboptimal or hard to specify ex ante but because bargaining for them would signal distrust. By contrast, state-imposed fiduciary obligations remove the invocation of distrust by either party to the agreement. We further observe that while fiduciary protections can help prevent distrust among a small number of contracting parties, fiduciary protections may prove inadequate in some settings, especially in addressing horizontal conflicts between beneficiaries. The chapter concludes by observing that the limits of contract and fiduciary law leave a residual zone of vulnerability in which trust and other mechanisms of risk reduction play a significant role

You Don't Always Get What You Pay For: Bonuses, Perceived Income, and Effort

Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. This paper provides conditions such that no success bonus induces the agent to exert more effort and the optimal contract is independent of success. Moreover, success bonuses may even reduce effort and thus the probability of success. The reason is that bonuses increase the perceived income of the agent and can hence reduce his willingness to exert effort. This perceived income effect has to be weighed against the incentive effect of the bonus. The trade-off is determined by the marginal effect of effort on the success probability in relation to this probability itself (success hazard-rate of effort). The paper also discusses practical implications of the finding.bonus, premium, incentives, income effect, moral hazard

Intention-Based Reciprocity and the Hidden Costs of Control

Empirical research suggests that - rather than improving incentives - exerting control can reduce workers' performance by eroding motivation. The present paper shows that intention-based reciprocity can cause such motivational crowding-out if individuals differ in their propensity for reciprocity and preferences are private information. Not being controlled might then be considered to be kind, because not everybody reciprocates not being controlled with high effort. This argument stands in contrast to existing theoretical wisdom on motivational crowding-out that is primarily based on signaling models.extrinsic and intrinsic motivation, crowding-out, intention-based reciprocity, incomplete information, hidden costs of control

Rethinking Human Development Based on Ar Ra’d Verse 11: How Can Preferences Influence Human Development?

As human is the centre of development process, it is important to consider preferences of human behavior whether they prefer to change themselves or not. This explanation is inspired by Qur’an surah Ar Ra’d verse 11 that can be interpreted as the set of preferences which might influence someone’s state of condition. However, human development index which is widely used indicator for development study do not consider preference as the main factor of development. Therefore aim of this study is to examine interpretation of that surah whether set of preferences that consist of trust, altruism, patience, risk taking, and negative reciprocity, can influence the state of human development. This research Uses Linear Probability Model (LPM) which is estimated by OLS with 76 countries as observation. The result shows that altruism, patience and risk taking can influence human development significantly, whereas trust and negative reciprocity are not significant. Trust is not significant because there might be a condition of distrust economic activities, rather than trust, that signaled by complete contractual arrangement, whereas non significant of negative reciprocity might because the costly punishment opportunity to punish someone as the form of negative reciprocity, therefore people that think rationally will not take the revenge to others

Playing 'Hard to Get': An Economic Rationale for Crowding Out of Intrinsically Motivated Behavior

Anecdotal, empirical, and experimental evidence suggests that offering extrinsic rewards for certain activities can reduce people's willingness to engage in those activities voluntarily. We propose a simple rationale for this 'crowding out' phenomenon, using standard economic arguments. The central idea is that the potential to earn rewards in return for an activity may create incentives to play 'hard to get' in an effort to increase those rewards. We discuss two specic contexts in which such incentives arise. In the first, refraining from the activity causes others to attach higher value to it because it becomes scarce. In the second, restraint serves to conceal the actor's intrinsic motivation. In both cases, not engaging in the activity causes others to offer larger rewards. Our theory yields the testable prediction that such effects are likely to occur when a motivated actor enjoys a sufficient degree of 'market power.

Team Governance: Empowerment or Hierarchical Control

We investigate a team setting in which workers have different degrees of commitment to the outcome of their work. We show that if there are complementarities in production and if the team manager has some information about team members, interventions that the manager undertakes in order to assure certain efforts may have destructive effects: they can distort the way workers perceive their fellow workers and they may also lead to a reduction of effort by those workers that care most about output. Moreover, interventions may hinder the development of a cooperative organizational culture in which workers trust each other. Thus, our framework provides some first insights into the costs and benefits of interventions in teams. It identifies that team governance is driven by the importance of tasks that cannot be monitored. The more important these tasks, the more likely it is that teams are empowered.team work, incentives, informed principal, intrinsic motivation

Laws and Norms

This paper analyzes how private decisions and public policies are shaped by personal and societal preferences ("values"), material or other explicit incentives ("laws") and social sanctions or rewards ("norms"). It first examines how honor, stigma and social norms arise from individuals' behaviors and inferences, and how they interact with material incentives. It then characterizes optimal incentive-setting in the presence of norms, deriving in particular appropriately modified versions of Pigou and Ramsey taxation. Incorporating agents' imperfect knowledge of the distribution of preferences opens up to analysis several new questions. The first is social psychologists' practice of "norms-based interventions", namely campaigns and messages that seek to alter people’s perceptions of what constitutes "normal" behavior or values among their peers. The model makes clear how such interventions operate but also how their effectiveness is limited by a credibility problem, particularly when the descriptive and prescriptive norms conflict. The next main question is the expressive role of law. The choices of legislators and other principals naturally reflect their knowledge of societal preferences, and these same "community standards" are also what shapes social judgments and moral sentiments. Setting law thus means both imposing material incentives and sending a message about society's values, and hence about the norms that different behaviors are likely to encounter. The analysis, combining an informed principal with individually signaling agents, makes precise the notion of expressive law, determining in particular when a weakening or a strengthening of incentives is called for. Pushing further this logic, the paper also sheds light on why societies are often resistant to the message of economists, as well as on why they renounce certain policies, such as "cruel and unusual" punishments, irrespective of effectiveness considerations, in order to express their being "civilized".