Agency and Self-Enforcing Contracts

Abstract

This paper studies the role of agency in the self-enforcement of interfirm contracts. When interfirm transactions are carried out by the agents rather than the owners, the agents' incentive to breach a contract for the benefit of their firm is typically lower than that of the owners if doing so entails a personal cost or a loss of private benefits. Thus agency has a commitment value in making contracts self-enforcing. The cost of agency is the typical moral hazard problem. Implications are drawn for transition economies in which formal institutions for contract enforcement are weak.J. Comp. Econom., March 2000, 28(1), pp. 80-94. School of Business, The University of Hong Kong, Pokfulam Road, Hong Kong, China; Division of Social Science, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China. © 2000 Academic Press.