The Bright and Dark Sides of Delegation: Principals, Agents, and Morality

With its broad explanatory power, agency theory has been widely used by researchers in a variety of social sciences (Eisenhardt, 1989). The classic principal-agent models highlight the information and incentives problems between agents (e.g., employees, contractors) and their principals (e.g., employers): in the absence of impeccable monitoring and incentive schemes, principals are vulnerable to agents’ opportunistic behaviors, including unethical and deceptive actions (Jensen, 1976; Williamson, 1984). The major focus of agency theory, however, ignores people’s moral motivations (Heath, 2009) and the social consequences of principals’ and agents’ actions (Dee, 1992). As a result, scholars suggest that the uncritical application of agency theory has already led to inadvertent mischief in organizations (e.g., Heath, 2009; Ghoshal, 2005; Kulik, 2005).Thus, this proposal seeks to amend agency theory by theoretically and empirically addressing the moral issues of principal-agent relationships in a broader social context. To exonerate themselves from ethical responsibility, principals often choose to hire an agent to delegate ethically questionable actions (Hammman, Loewenstein, & Weber, 2010). Similarly, agents may also feel less accountable for engaging in unethical actions dictated by principals. This view seems consistent with the popular public belief of often untrustworthy agents (Murnighan, Cantalon, & Elyashiv, 2001). In this research, however, we propose that agents don’t always behave less ethically as a result of the diffusion of moral responsibility (Darley & Latane, 1968). Instead, we suggest that their actions are a function of principals’ reputation, the ethical nature of principals’ commands, the social consequences (harm vs. benefits) of the delegated actions, and the incentive alignment between principals and agents. For example, accessing multiple principals (Dee, 1992) gives agents the opportunity to choose more over less ethical principals. When incentives are similar, agents will be motivated to work for more ethical principals who are less likely to dictate unethical orders. On the other hand, the social costs of delegating unethical actions (e.g. the harm to others) may loom large to agents when principals enjoy more benefits. Thus, all else equal, the lack of a seamless incentive system between principals and agents may discourage agents from carrying out principals’ unethical orders, especially when agents’ smaller gains don’t match others’ greater losses (Gneezy, 2005). We propose three complementary experimental and field studies to test these propositions and a new principal-agent model of moral relations in organizations.