Economic Foundations of Strategy provides not only the essential basic tenets of strategy, it also shows the inter-relationships of five major theories of the firm: the behavioral theory; transaction costs theory; property rights theory; agency theory; and dynamic resource-based theory. Even though technological, organizational and institutional change advances breathlessly, the theories of the firm provided in this research book are durable principles that have stood, and the author maintains will continue to stand, the test of time. Economic Foundations of Strategy emphasizes the complementarities among these five theories of organization, and the potential for integrating these theories in the evolving science of organization. Applications of these theories to business practice are emphasized throughout the book.
Chapter 4: Agency Theory
Agency theory is an influential approach to the study of corporate governance in strategic management (Eisenhardt, 1989; Kosnik, 1987; Oviatt, 1988; Rediker & Seth, 1995). While Berle and Means (1932) tended to be pessimistic about the economic effects of the separation of ownership and control, modern agency theorists (e.g., Fama, 1980; Fama & Jensen, 1983a; Jensen & Meckling, 1976) shift the emphasis from capital market failures to capital market efficiencies (Jaffe & Mahoney, 1999). Thus, modern agency theory is quite distinct, in this regard, from transaction costs theory.
Modern agency theorists tend to be (overly) optimistic that various governance mechanisms (e.g., the market for corporate control, the market for managers) have solved agency problems. In fact, some agency theorists (e.g., Fama & Jensen, ...