The Opportunistic Principal

Abstract

This article sheds light on a surprisingly persistent gap in economic theory: Economists have extensively studied agency relationships between principals and agents, but economic analysis has traditionally been preoccupied with problems created by agents rather than principals. Principal-agent theory traditionally neglects opportunism on part of the principals. As a result, economic theory fails to fully explain gaps in economic performance. Even worse, the for decades biased concept of opportunism has shaped generations of students in economics and business and thus has contributed to deficient managerial and economic outcomes. Under the presumption that not only agents but also principals demonstrate opportunistic behavior, the economic definition of opportunism as established by Oliver Williamson is further developed. This contribution extends the concept of opportunism to principals. The principal’s illegitimate interference with the autonomy of the agent is discussed which shows that whilst agent opportunism largely rests on information asymmetry, principal opportunism feeds itself off power asymmetries. In an interdisciplinary effort and building on recent research in the area of bullying and mobbing, the economic rationale of principal opportunism is explained with the help of a simple game-theoretic model. On this basis, it is demonstrated how a more balanced perception of principal agent relationships can contribute to an updated theory of the firm.