A Contextualized Model of Headquarters-subsidiary Agency Problems

This paper proposes an agency model for headquarters-subsidiary relationships in multinational organizations with headquarters as the principal and the subsidiary as the agent. As a departure from classical agency theory, our model is developed for the unit level of analysis and considers two root causes of the agency problem – self-interest and bounded rationality. We argue that one cannot assume absolute self-interest and perfect rationality of agents but should allow them to vary. We explain subsidiary-level variation through a set of internal organizational and external social conditions in which the headquarters-subsidiary dyad is embedded. We then discuss several agency scenarios that lead to different manifestations of the agency problem. The framework informs more relevant applications of agency theory in organizational studies and motivates future research.