Building genuine (decision-making) behaviour into economic models

Economists endeavour to emulate the behaviour of actors in economic contexts in order to calculate the consequences. The difficulty is this: Many at times restrictive assumptions concerning the behaviour of actors do not reflect the real world. A new project funded by the Anniversary Fund of the OeNB (Oesterreichische Nationalbank) aims to get a better grasp on reality.

Take, for instance, an employment contract: An employer enters into a contract with an employee, in which the latter promises to deliver an agreed work performance. The so-called principal agency theory (PAT) assumes that the employee (= agent) has an advantage over the employer (= principal) in terms of information, which can be used in different ways either favouring or to the detriment of the principal. The theory also assumes that the interests of both parties are not identical. An agreement serves the purpose of levelling the differing interests. However, in order to determine the contract, further assumptions are made: For instance, that the parties involved are equipped with perfect information about the (corporate) environment, or that the employer is perfectly aware of certain employee traits (e.g. goals, attitude to work, productivity).

“The example clearly shows: Some of the assumptions used are highly restrictive. Precisely here lies the weak point of the normative principal agent theory”, lead scientist Stephan Leitner explains. This is contrasted by the positive PAT, which acknowledges this problem and argues for making more realistic assumptions. Together with his colleagues, Stephan Leitner (Department of Management Control and Strategic Management) hopes to deliver new insights regarding the dynamics of delegation relations. He adds: “Our analysis aims to increase the efficiency of contracts in routine situations.”