Trust As a Means of Improving Corporate Governance and Efficiency

February 1, 2002

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Agency problems within the firm are a significant hindrance to efficiency. We propose trust between coworkers as a superior alternative to the standard tools used to mitigate agency problems: increased monitoring and incentive-based pay. We show how trust induces employees to work harder, relative to those at firms that use the standard tools. In addition, we show that employees at trusting firms have higher job satisfaction, and that these firms enjoy lower labor cost and higher profits. Finally, we show how trust may also be easier to use within the firm than the standard agency-mitigation tools.

Subject: Corporate governance, Economic sectors, Financial institutions, Financial sector policy and analysis, Insurance, Labor, Moral hazard, Tax incentives, Wages

Keywords: asymmetric information, company loyalty, corporate governance, efficiency, Europe, firm need, Global, Insurance, moral hazard, nonaltruistic firm, profit sharing, shareholder-employee agency relationship, trust, wage contract, Wages, WP

Pages:
36
Volume:
2002
DOI:
https://doi.org/10.5089/9781451845198.001
Issue:
033
Series:
Working Paper No. 2002/033
Stock No:
WPIEA0332002
ISBN:
9781451845198
ISSN:
1018-5941

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