Agency theory studies the impact of and remedies to asymmetrically distributed
information in principal-agent relations. Yet, it does so in a surprisingly binary
manner: It assumes the principal to be perfectly knowledgeable of some pieces of
information (such as the agent’s risk aversion), while others (such as the agent’s
true effort exerted) are considered to be perfectly private information of the agent.
Agency theory thus makes very asymmetrical assumptions about the knowledge
of principals and agents, largely neglecting the human capacity for interpersonal
sense-making. This chapter explores the implications of instilling agency theory
with a more realistic account of the human capacity to read other people’s desires,
intentions, knowledge, and beliefs—that is, to have a theory of someone else’s
mind
