New on SSRN: Epistemics at Work: The Theory of Mind in Principal-Agent Relations

An interesting working paper that offers a useful perspective on allocation of decision making between lawyer and client.

Stefan Linder, ESSEC Business School

Nicolai J. Foss, Copenhagen Business School – Department of Strategic Management and Globalization

Diego Stea, Copenhagen Business School – Department of Strategic Management and Globalization

February 24, 2014

Abstract: 

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.
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