The economics of ethics: A new perspective on agency theory

Abstract

Agency theory provides a series of instructive parables concerning the systems consequences of unreservedly opportunistic behavior. Due to a mutual lack of trust, some otherwise mutually beneficial exchanges do not take place. And, even when exchanges do take place, there are dead-weight losses due to monitoring costs and inefficient risk sharing. Therefore, in ex ante terms, everyone may be better off if they mutually agree to restrain their opportunistic behavior. Unfortunately, by its very nature, opportunistic behavior is not readily observed. Thus, an agreement (i.e. ethical code) to abstain from opportunistic behavior cannot be effectively enforced by external rewards or sanctions; instead, the sanctions for unethical behavior must be internalized. Hopefully, this article will stimulate ideas for incorporating ethics in discussions of accounting, using agency theory as a convenient vehicle.