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Agency theory: background Agency

theory
and epistemology
Josh Bendickson
Department of Management, University of Louisiana at Lafayette,
Lafayette, Louisiana, USA
437
Jeff Muldoon
School of Business, Emporia State University, Emporia, Kansas, USA
Eric W. Liguori
Department of Entrepreneurship, University of Tampa,
Tampa, Florida, USA, and
Phillip E. Davis
Management Department, Texas State University San Marcos,
San Marcos, Texas, USA

Abstract
Purpose – By revisiting the agency theory literature, this paper aims to both incrementally advance
historical viewpoints and reveal four prominent influences on agency theory: Weber and Simon, The
Great Depression, Cooperation and the Chicago School. This is critical given that understanding the
history behind the authors’ major theoretical lenses is fundamental to using these theories to explain
various phenomena.
Design/methodology/approach – Drawing on a plethora of archival sources and following the
influence-mapping approach used by other management history scholars, this manuscript synthesizes
historical accounts and archival information to provide a clearer picture of the major historical
influences in the formation of agency theory.
Findings – We shed light on four areas related to management history that helped propel agency
theory. Whereas past scholarship has not recognised them as influencers, we find and show how the
industrial revolution, unionization, the stock exchange and other management approaches all played a
role in the development of agency theory’s core tenants.
Originality/value – We extend upon the influential people and events that shaped agency theory,
thus providing a fuller understanding of the theory’s usefulness. Moreover, we fill in gaps enabling
scholars to better understand the context in which the core tenants of agency theory were developed.
Keywords Agency theory, Adolf Berle, Chester Barnard, Herbert Simon, Mary Follett, Max Weber
Paper type Conceptual paper

Introduction
The question of when and how agency theory was formalized is intriguing. The answer
could provide a much stronger understanding of the context, limits and practicality of
the theory. Accordingly, in this paper, we track the emergence of agency theory across Journal of Management History
Vol. 22 No. 4, 2016
pp. 437-449
The authors would like to acknowledge the helpful comments and feedback received from Art © Emerald Group Publishing Limited
1751-1348
Bedeian, Jean McGuire and Patrick Murphy on earlier versions of this manuscript. DOI 10.1108/JMH-06-2016-0028
JMH a century of business scholars and business events, showing how the apparent inability
22,4 of both management practitioners and scholars to address the problem of managerial
agency, despite some obvious attempts, encouraged development of this now seminal
theory (Berle and Means, 1932; Fama and Jensen, 1983; Jensen and Meckling, 1976). This
problem was famously highlighted by Smith (1776) in his seminal work, The Wealth of
Nations, which posited how the emergence and increasing prevalence of the joint stock
438 company created a dangerous gulf between owners and managers. More specifically,
Smith (1776, pp. 574-575) noted:
The directors of such companies … being the managers rather of other people’s money than of
their own, it cannot well be expected that they should watch over it with the same anxious
vigilance with which the partners in a private company frequently watch over their own …
Negligence and profusion, therefore, must always prevail, more or less, in the management of
the affairs of such a company.
In identifying the relationship between owners and managers as a critical and central
dynamic of the emerging free enterprise system, Smith understood that agency conflicts
threatened negative economic and organizational outcomes. By contrast, modern
agency theory posits “principal-agent relationships should reflect efficient organization
of information and risk-bearing costs” (Eisenhardt, 1989, p. 59). These differences
between Smith’s initial perceptions and recent hypotheses are clearly significant, given
agency theory’s prominence not only among strategy and corporate governance
scholars but also by scholars in accounting, finance, operations management,
information systems and economics (Bahli and Rivard, 2003; Crutchley and Hansen,
1989; Logan, 2000; Noreen, 1988; Ross, 1973). Given modern agency theory consists of a
multitude of diverse users, many of whom may possess a general lack of critical
historical understanding, understanding of agency theory’s historical context is
overdue and much needed.
As scholars seek ways to deepen our understanding of agency theory, an enriched
contextual and conceptual history is needed to specify the conditions under which the
development of the theory was forged. Such an account identifies the bedrock of agency
theory and offers scholars additional perspectives on its application. Therefore, this
paper proceeds as follows. First, we further explore some of the underpinnings already
noted, adding in additional information and context. Second, we enhance this
conversation by incorporating new historical developments and individuals, which had
great influence on this development. Third, we discuss the impact and implications of
these events. Last, we synthesize the points examined and offer not just directions for
future research but also words of caution for agency scholars as they continue their
research.

Agency theory: it’s intellectual origins

From its roots in economics, agency theory has been used by scholars across several
different disciplines, including organizational behaviour (Eisenhardt, 1985), law (Lan
and Heracleous, 2010), marketing (Bergen et al., 1992), health care (Jiang et al., 2012),
accounting (Reichelstein, 1992) and family business (Tsai et al., 2006). The lens offered
by agency theory typically hinges around either the principal-agent problem
(principal-agent research) or governance mechanisms (positivist research). In essence,
agency theory stems from an economic view of risk-sharing (Eisenhardt, 1989), which
occurs between two parties, principals and agents, yet each of the two parties may
possess different approaches to solve the problem (Jensen and Meckling, 1976). The Agency
principal’s appetite for risk-sharing is of concern, because the principal has bestowed theory
certain responsibilities unto the agent to achieve like-minded goals. This cooperative
behaviour (Barnard, 1938) is expected to yield the outcomes specified by the principal.
However, at the very heart of the agency problem lies the concern of self-interest
behaviour that may encourage an overzealous agent to not act in the best interest of the
principal (Burnham, 1941). In the eyes of the principal, this divergence poses a problem 439
and changes the agency costs (Fama, 1980). When the principal-agent relationship is
initiated, the agency costs are clear to the principal. However, when the agent takes
action counter to the agreement, the principal perceives that he or she has assumed more
risks. And hence, the first agency problem (viz., shifts in risk-sharing) emerges.
The second agency problem directly stems from the first. Agency theory denotes that
when agents have equity in the firm, they are more likely to embrace the actions desired
by principals as those of their own (Fama and Jensen, 1983). Eisenhardt (1989) went
further to theorize that when those actions are outcome-based, the agent is more likely to
behave in the interest of the principal. However, if a perceived inequity exists, agents are
likely to engage in self-interested behaviour. When the agent engages in self-interested
behaviour, information asymmetries are created where the principal is unable to
properly monitor agent behaviour. The measurability of outcomes (Anderson, 1985)
thus becomes elusive, leading to another problem – monitoring agent behaviour. Given
the nature of the two agency problems, governance mechanisms are needed to help align
risk and monitor agent behaviour, which leads us back to the positivist perspective of
agency theory.
In summary, two perspectives in agency theory have emerged: principal-agent
research and positivist agency theory. Principal-agent research identifies two possible
agency problems: risk-sharing and agent monitoring. The two problems are linked in
that, a divergence in the area of risk-sharing creates information asymmetries, which in
turn reduces the principal’s ability to monitor agent behaviour. The shift in risk-sharing,
whether perceived or actual, makes it inherently difficult to create an ideal contract
between the principal and the agent. Positivist agency theory focuses on those critical
governance mechanisms that limit agent’s self-serving behaviour (Eisenhardt, 1989).
Such mechanisms are believed to provide the desired alignment of goals and objectives
for principals and agents, yet Dalton et al. (2007) question whether or not these
mechanisms are effective. To explore this quandary, we offer an historical analysis of
the key underpinnings leading up to agency theory’s development. Although recent
scholarship has directed our attention toward this issue (Bendickson et al., 2016), four
crucial and yet-to-be-examined historical influences can be identified: the underpinnings
of Max Weber and Herbert Simon, the Great Depression of the 1930s and Berle’s
reflections on some of its managerial causes, cooperation via Barnard and Follett, and
last, the Chicago School and the resurgence of neo-classical economic theory (see
Figure 1 for a more comprehensive overview of these underpinnings).

Conceptual underpinnings
Weber and Simon
One of the most significant contributions to the development of agency theory emerged
from the work of Max Weber, the great German sociologist. Weber’s (1947) work on
bureaucracy, in particular, represents an important attempt to contend with the agency
JMH
The
22,4 Industrial
Revoluon
The Stock
Market

Organized
Labor &
440 Gompers Unions

Scienfic
Taylor et al. &
Mgmt.
Gilbreths

Under - pinnings
Weber &
Simon
Agency
The Great
Depression Theory
Berle &
Means

Cooperaon
Barnard
& Folle

The
Hawthorne
Studies
Mayo &
Roethlisberger

Chicago
School

Figure 1. Fama, Jensen,

& Meckling
Agency theory
timeline map

problem. In his work, Weber describes an ideal type of bureaucracy where individuals
are rational, and rules and preferences are clearly understood and respected. Although
Weber discusses several types of authority, we focus on his discussions of formal
authority, given that formal authority is the basis of contracts (especially legal
contracts) in agency theory. For Weber, the basis of bureaucracy is that one party can
make a legal claim to perform certain activities. These claims are defined rationally and
(or) expediently. The ability of one party to enter into the relationship is of their own
choice as well as the fact that their continual membership in the organization is based on
following the rules that have been set. Yet, the willingness of the follower to adhere to
rules is based on the leader’s position; in essence, the follower respects the position, not
the leader.
In Weber’s ideal of the bureaucracy, the agency problem, if it does not entirely
disappear, is no longer a pressing issue. A leader’s capacity to enforce expectations
comes from law. A leader can also make use of technical rules, or use of other
jurisdictions, to ensure enforcement of what the principal may demand from the agent.
In addition, the contract to work in this case is clear and preferences are well-defined. Yet Agency
at the same time, the agent is able to leverage their skills to carry on work that the theory
principal is unwilling or unable to do. However, the ability of the agent to exercise their
own interests is limited, as contractual obligations and enforcement mechanisms are
clear.
It is clear that in the real world, bureaucracy does not work in this fashion. One of the
earliest critics of bureaucracy came from the eminent sociologist Robert Merton. Merton 441
(1940) argued that bureaucracy was problematic because it separated individuals from
their personality. A more prominent challenge came from the future Nobel Laureate in
economics, Herbert Simon. Simon was a political scientist, sociologist, psychologist and
computer scientist. Simon’s (1965) work on organizations provided a seminal
contribution to the field of management in providing an intellectual rationale as to why
management mattered. Modern economics assumes that all prices are known;
individuals are rational and have all knowledge. Simon (1965) posits that individuals are
boundedly rational (i.e. their rationality is limited given information asymmetry,
cognitive ability, time, etc.), yet prior scholars failed to note or fully explore the difficulty
bounded rationality poses for organizations. Seen from this perspective, managerial
orders may not be understood as individuals are boundedly rational. Hence, agency
problems may emerge not from the underhandedness of the agent (or principal) but as a
natural result of poor communications. Managerial incentive systems will also be of
limited benefit as principals may struggle to understand the proper incentives needed to
ensure adequate contributions. As people satisfice (i.e. settle for a satisfactory solution
in the absence of an optimal one; Simon, 1965), they may not spend adequate time and
energy to find out what incentives agents may wish. Given bounded rationality, then,
both enforcement mechanisms and which contributions are needed remain vague.

Berle and the Great Depression of the 1930s

Scholars have long debated the extent to which the Great Depression was national or
international: the French blamed the Germans; the Germans, the British; and the British,
the Americans (Garraty, 1987). Still, other scholars contend the Great depression was the
product of the First World War (Kindleberger, 1986). One camp, led by Milton Friedman,
argued that it stemmed from the Federal Reserve’s failure to provide enough money for
the market economy to work (Friedman and Schwarz, 1963). Another school, led by John
Maynard Keynes, placed the blame on structural inequities in the economy that led to
under-consumption. This school subsequently found support from prominent
intellectuals, including historian Arthur M. Schlesinger, Jr. and economist John Kenneth
Galbraith, as well John Dewey, Rexford Tugwell and Adolf Berle, Jr. (Schlesinger, 1958).
An early New Dealer, Berle, wished to replace capitalism with a system based on a
combination of a market economy and state planning (Schwarz, 1987). Property would
remain private, but the government would regulate prices and production. Berle, in the
words of his biographer, sought to be the Marx of the shareholder class (Schwarz, 1987).
Berle was aided in his endeavours by the Harvard-trained economist Gardiner Means.
Together, they produced an analysis of corporate governance that found wide spread
acceptance and helped inspire the First New Deal (Berle and Means, 1932; Brinkley,
1996; Schlesinger, 1958, 1959).
Berle and Means (1932) contended the majority of the wealth was held by only 600
corporations, and these corporations were controlled by managers. Concentration of
JMH wealth into the hands of so few meant that firms no longer had to worry about the price
22,4 market system or competition. Accordingly, the profit motive was eliminated and
replaced with political behaviour and social posturing (i.e. captains of the industry acted
more like prime ministers than businessmen; Berle and Means, 1932). The ability of
owners to monitor the manager declined as owners had become increasingly diverse and
were so spread out; no one owner could effectively enforce his property rights, a problem
442 that could only be redressed through government action (Berle and Means, 1932).

Barnard and Follett: principal-agent resolution through cooperation

Chester Barnard and Mary Parker Follett also researched the challenges society was
facing as a result of the Industrial Revolution (Wren and Bedeian, 2009). Both were
concerned with the development of cooperative systems and how these systems could
survive a world where conflict and power seemed to be privileged more than
cooperation. Unlike Weber, however, Barnard and Follett (and Mayo) recognised
humanity was too capricious and venal to accept knowledge and authority as a guide
(Whyte, 1969). In a way that Weber did not, they noted other social factors were at play.
First let us consider Barnard. Barnard attended Harvard in the early twentieth
century, but unlike many of his peers he was neither a Brahmin nor a member of the elite
(Franklin Roosevelt; Homans, 1984). Barnard was a scholarship student from a small
farm in Massachusetts, and while he never did graduate from Harvard (he failed to fulfil
a laboratory science requirement), he quickly rose above the ranks to become president
of the New Jersey Bell telephone (Gabor, 2000). Unlike other executives, Barnard wrote
about his thoughts on management: thoughts that were influenced by his love of the
classics (e.g. Pareto, Weber and Whitehead). Because of his interests in Pareto, his work
in the field and his professional stature, Barnard was recruited to attend Henderson’s
famous Pareto seminar where he met Homans, Henderson and Mayo. The ultimate
result of his interactions at the seminar was Functions of the Executive (Barnard, 1938),
a classic in the field of management that, in terms of influence, is second only to the work
of Taylor (Bedeian and Wren, 2001).
Like Fayol, Barnard recognised that management and workers could pursue their
interests at the expense of ownership (Wren and Bedeian, 2009). Interests at the expense
of ownership are contrary to cooperation. Given society is based on the idea of
cooperation, this posed obvious challenges. To explain such outcomes, Barnard
postulated his “theory of opportunism” and the “power of choice”, thereby predating
much of the Carnegie School’s ideas and concepts (Wren and Bedeian, 2009). Barnard’s
recognition of people’s capability for self-determination (under certain biological and
situational constraints), and the notion that individuals can have interests outside of the
cooperative, are central to understanding the principal-agent problem (Barnard, 1938).
Barnard also posited that the only means by which authority could be maintained
was by the consent of the governed and that acceptance would thus derive from an
inducement/contribution model where the organization provided inducements ranging
from material to non-material goods (Barnard, 1938). Ultimately, Barnard believed
organizational pride, purpose and culture could guide worker behaviour.
Follett, like Barnard, is no stranger to management historians, with the Journal of
Management History having published more articles on Follett from 2010 to 2014 than
almost any other individual (second only to Taylor; Schwarz, 2015). Follett, like
Barnard, was also educated through the Harvard system having attended Radcliffe
College (Harvard’s sister school for women, given Harvard was all-male at the time). Agency
However, Follett’s background and area of study differed from Barnard’s: she came theory
from a family of means (Wren and Bedeian, 2009) and was studied on politics, not
business, having even published a now-classic book on the Speaker of the House of
Representatives. As a political scientist, Follett read deeply in the works in German
idealism, especially the works of Fichte. Like Fichte, Follett believed people’s rights and
true selves emerge from their social relationships (Wren and Bedeian, 2009). Therefore, 443
the principal issue from Follett’s perspective was how to maintain cooperative systems
where rights and values emerged from social interaction.
Recognizing how cooperative systems could break down and that people gain
identity through social systems, Follett immediately understood how principal-agent
conflict could occur. More specifically, Follett (1998) recognised that both managers and
owners need each other. Without capital, managers would not be able to run competitive
companies. Without managers, owners would not be able to separate themselves from
running the company and, thus, would be forced to learn management skills necessary
to run the company. Finding a way to integrate the needs of both parties thus becomes
the trick to managing a relationship.
Follett’s principal contribution to management was to develop systems of conflict
resolution that transcended compromise. She posited conflict could be solved via three
general mechanisms (Follett, 1924), but only one of those really stood the test of time. Her
first mechanism was domination of one side over another. But, domination is a poor
option for two reasons. First, given the costs of enforcing contracts as well as market
conditions, it is almost impossible for owners to completely dictate terms to managers.
Second, given managers do not own the company, they cannot easily dominate owners.
Follet’s second mechanism was compromise (meeting in the middle with concessions).
But as neither side then gets what they want, this tends to cause negative feelings and
the emergence of other divisive issues (Wright, 2000). It is in Follett’s third mechanism,
integration (viz., combining what both sides want into a unique solution), which to this
day provides the key to solution used to reduce and/or resolve agency problems. In
agency contexts, owners generally want agents to take more risk, and agents are often
risk-averse because their wealth is tied into the corporation. And, in corporate
governance, Follet’s proposition of an integrative solution would be to compensate
executives for taking on added risk (something modern corporations do to this day, e.g.
use of golden parachutes; Cochran et al., 1985; Singh and Harianto, 1989).

The Chicago School and the move towards theory

Despite the work of Berle and Means, the emergence of a coherent agency theory did not
occur until the 1970s-1980s, when the theory was developed by Jensen and Meckling (1976)
and Fama and Jensen (1983). One particular issue of why this theory emerged is that the
1970s, like the 1930s, saw a steep decline of the US economy. In this context, some of the most
interesting comments on the issues related to agency came from the Chicago School of
Economics. During the period from the 1950s to the 1980s, the economics department at
Chicago was a citadel of free market capitalism under the intellectual leadership of Milton
Friedman, George Stigler and other leading lights (Yergin and Stanislaw, 2002). One of the
most interesting arguments behind the agency approach would come from finance, in
particular, Jensen and Meckling’s (1976) examination of finance markets and of the ways in
which they promote efficiency.
JMH The core thesis of Jensen and Meckling (1976) is that the market provides incentives
22,4 to limit agency. In particular, the market provides incentives to both parties to limit
agency costs. Companies, especially the decision makers, have incentives to reduce
agency costs. Corporations not reducing agency costs thus suffer negative
consequences. This will occur due to the efficiency of markets in that, information is
well-known and easily disseminated. Thus, if there is an issue with a firm, investors will
444 know and will punish the firm accordingly (viz., both the principal and the agent will
suffer from the loss of market capitalization). Firms can lower this risk through
contracts, monitoring and incentives. Although there is a cost of enforcement and
analyzing, firms that do a better job handling this should be more successful. Mahoney
(2005), a critic of the Chicago School, calls this approach optimistic. It is optimistic that
firms can readily identify all aspects of an agency problem. In addition, the literature is
uncertain if agency impacts performance. Certainly, the model places too much
emphasis on the agent at the expense of institutions or other corporate politics.
Nevertheless, firms have incentives to try and avoid this problem between agent and
principal. That is not to say that other issues may not arise (e.g. honest incompetence) or
that other stakeholder issues may not occur.
The Chicago approach made several noteworthy findings that were either a rebuttal
to or based on some of the previous underpinnings. First, reflecting the Chicago School’s
belief in the efficiency of markets, Fama and Jensen (1983) disagreed with Berle and
Means’s (1932) contention that the market did not have the ability to punish inefficient
corporations. This belief was reflected in Fama’s (1980) contention that the market is
efficient in setting prices. Like Berle and Means (1932), Fama and Jensen (1983) did have
property rights as a prime consideration. Fama and Jensen (1983), however, placed a
belief that the market could protect property rights; lastly, they adapted notions of
bounded rationality, in that enforcement mechanisms are costly.

Discussion
Understanding the context by which history shaped agency theory is critical. Theories
are the products of the theorists who create them, so inevitably the life experiences of the
theorist impact on the development of the theory (Muldoon et al., 2013). Understanding
these influences thus enable us to better understand the theory and its limitations, as
well as to inform future research (Muldoon et al., 2013). Unfortunately, despite the
importance of theory to the management literature, scholars typically do not pay
sufficient attention to the circumstances of how theory emerges.
The early work of Berle and Means (1932) still continues to influence the ongoing
debate in agency theory (viz., the focus on the separation of ownership and management
and the inability of owners to fully protect their property rights). This is a rather
remarkable development given that scholars have struggled to find relationships
between agency problems and corporate performance. This myopia has been to the
disadvantage of the theory. Some scholars have begun to unearth the various other
problems that arise from the separation of ownership and management. Mills (1990) and
Mitchell and Meacheam (2011) expand on the literature by presenting unique
principal-agent relationships. Accordingly, there is a potentially long list of conflicts
that may emerge between principal-principal and other stakeholders in the firm.
Scholars have also neglected to thoroughly investigate honest incompetence, another
principal problem (Hendry, 2002), perhaps because prior agency dialogues have focused
primarily on enforcement of property rights and causes of conflict. Whereas the 2008 US Agency
economic downturn is widely attributed to dishonest behaviour, perhaps elements of theory
honest incompetence were also to blame. As the contemporary landscape continues to
emerge, scholarly investigation must also continue to evolve. It is the burden of scholars
to objectively investigate all aspects of agency phenomena. No longer can scholars (and
the media) continue to assume criminality via incompetent monitoring by owners and
government (Ferrell and Fraedrich, 2014); honest incompetence must also be considered 445
(n.b., it is a plausible theory that surrounding honest incompetence lacks explanatory
power). The recent financial meltdown of 2008 was viewed from the prism of dishonesty
rather than potentially honest incompetence.
However, this is not to say that both honest incompetence and ownership issues are
not in line with one another. For instance, in an interview with the Wall Street Journal,
Aubrey McClendon, head of Chesapeake Energy, proposed that the recent credit crisis
would not have been as severe or as prolonged had C-level executives from Citibank and
other financial institutions been required to purchase a percentage of each
mortgage-backed security they acquired (Schwartzel, 2012). Unfortunately, this
statement is different from what agency theory assumes. Namely, agents do not have
stock or some tie to the firm, and this makes them more prone to risk, rather than less
prone. This demonstration of moral hazard (viz., increased risk assumption when the
cost of the risk is devoid of the individual making the decision) is perhaps focal to the
issue. If the moral hazard argument stands, agency theory’s presumption of agent
risk-aversion is either incorrect or even more complicated than expected. Regardless,
there is one unifying truth most scholars agree on: regardless of opportunism or
incompetence, a principal’s inability to enforce property rights creates problems that
negatively impact the firm.
Additionally, Berle ignored the different types of principals, choosing to focus more
on property rights, perhaps so he could stress the need for government intervention to
promote the solidarity of the technocratic elite. Regardless, Berle’s more narrow focus
neglected one important consideration: the complexity of the relationships among
principals. His analysis mistakenly assumed that the great concentration of wealth
eliminated competition between the plutocrats. Even despite the emergence of a
principal-principal stream of agency research (Young et al., 2008), there is still a need for
further integration and exploration of the agency question. More specifically, in this
situation would one expect increased or decreased monitoring of the agent, and is there
a role to be played by the agent in balancing both? These questions continue to exist and
remain rather unexplained. An issue in agency is that the theory, for the most part, has
not wholly considered the role of personality (Stigler and Becker, 1977). One particular
reason is that modern economics (in exception to behavioural economists) downplays
the role of personality influencing exchange issues. The agency argument is one of
situations in that agents and principals are in different situations and these different
situations promote different behaviours and wishes. Thus, the emphasis of economics in
agency theory has potentially ignored psychological factors such as mood, affect,
emotion and personality (Caplan, 2003). Such psychological factors come into play when
considering the complexities of familial ties in a family business. Yet, personality
psychology has gone far beyond the situational argument in that personality matters a
great deal in behaviour. The work of Chatterjee and Hambrick (2007) on narcissistic
CEOs illustrates this trend, although more work is needed on this issue. It could be that
JMH agents and principals signal to each other explaining exactly what the other wants
22,4 which may lower agency costs as both sides may have an agreement. This arrangement
transcends basic contractual issues paramount to agency theory.
Despite the obvious issues with principal-agent problems, another particular
limitation with the agency theory is that the focus has been on market-dominated
corporations working in the free-market and/or in the USA. The agency problem may
446 not be as acute in family-dominated firms, as the family may have strong enforcement
mechanisms at their control (Lane et al., 1998). At the same time, these authors point out
that families may not be willing to use their enforcement. The basis of this argument
comes from the “Bad Child Theory” that was proposed by the Chicago economists
Becker and Lewis (1974). They argued that incentives exist to provide even for bad
children. This sense of altruism is commonplace in families and as there is no
punishment, problems still exist in terms of performance. This outcome reflects the US
domination of the field. Nevertheless, in spite of this issue, there is considerable debate
whether the agency problem actually leads to lower outcomes for organizations. This
may bolster the arguments from the Chicago School of agency theory that the market is
able to address failures of organization or that the problems are much more subtle and
difficult to track than scholars have thought. Or that despite the fact that the market
may lower the costs associated with agency, those costs never go away and certain
issues remain with the agent that never disappear, including market rise as well as
honest incompetence.
Lastly, while some scholars have made important headway in addressing some
concerns with the agency theory (Bendickson et al., 2016; Cuevas-Rodríguez et al., 2012),
we also attempt to contribute to the literature by enhancing these claims from a more
historical viewpoint. Incorporation of this historical context promotes understanding,
presents a more comprehensive account of the underpinnings and draws attention to
some additional problems of agency theory based on the past. Hayek (1988, p. 76)
famously posited that economics should “demonstrate to men how little they really
know about what they imagine they can design”. With this in mind and given any theory
requires periodic revision to maintain relevance, we hope that by highlighting the
antecedents and underpinnings of agency theory, scholars will be better able to
understand its own future. Moreover, by reviewing the history, we were able to uncover
shortcomings of the theory and shed light on various areas issues due to the evolving
nature of society and business.

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About the authors

Dr Josh Bendickson is Assistant Professor, Management at the University of Louisiana at
Lafayette. Bendickson presently serves as Vice President of Publications for the United States
Association for Small Business and Entrepreneurship.
Jeff Muldoon is an Assistant Professor of management at the College of Business at Emporia
State University. His research interests include management history, leader–member exchange
and interpersonal conflict at work.
Dr Eric W. Liguori is Assistant Professor, Entrepreneurship in the John P. Lowth
Entrepreneurship Center at The University of Tampa. Liguori presently serves as Vice President
of Research for the United States Association for Small Business and Entrepreneurship. Eric W.
Liguori is the corresponding author and can be contacted at: [email protected]
Phillip E. Davis is an Assistant Professor of management at the College of Business at Texas
State University. His teaching and research interest include strategy, capabilities,
entrepreneurship and small business management.

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