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

Stefan Linder, Nicolai J. Foss, Diego Stea

    Research output: Working paperResearch

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    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.
    Original languageEnglish
    Place of PublicationFrederiksberg
    PublisherInstitut for Strategic Management and Globalization
    Number of pages28
    ISBN (Print)9788791815959
    Publication statusPublished - Feb 2014
    SeriesSMG Working Paper


    • Agency theory
    • Principal-agent relationship
    • Epistemic assumptions
    • Theory of mind

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