Agency Theory, Evolution, and Austrian Economics

This paper analyzes the evolution of agency theory and shows how Austrian economists and, in particular, Mises largely anticipated these developments. Our analytical framework is the evolution of agency theory and we argue that it is a quest for more realism that has been the driving force of this evolution. We analyze how the agency literature has evolved since its first developments with the standard principal-agent models by integrating into the analytical framework the role played by implicit incentive mechanisms to minimize the problems associated with asymmetric information and conflicts of interest. We analyze how research in different fields has contributed to agency theory's evolution and we show that these developments can be traced back to the work of Austrian economists and, in particular, to Mises's works. We finally argue that despite the fact agency theory has largely improved its analysis of agency problems and of the remedies to mitigate these problems, it has not yet incorporated in its analyses a crucial contribution made by the Austrian economists, which is the role played by the entrepreneur. JEL Classification: D 820, L510, P510