Social networks and the adverse selection problem in agency relationships

The purpose of this study is to illustrate how the examination of a potential partner's network of relationships alleviates costs associated with the adverse selection problem.

Abstract

Agent selection is one of the most challenging decisions faced in the implementation of organizational strategy. Despite the central importance of this decision, limited research has addressed pre-contractual evaluation of agents. The purpose of this study is to illustrate how the examination of a potential partner's network of relationships alleviates costs associated with the adverse selection problem. Propositions that underscore the influence of network quality and structure on pre-contractual uncertainty are developed.