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Building friendship with Boss: Strategic prosocial behaviors in the agency model

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  • Ho, Shirley J.
  • Tsai, Yi Hao

Abstract

In reality, friendship is not a zero or one relationship and it is not always reciprocal. We analyze how the degree of CEO-directors friendship and players’ recognition of this degree can affect the actions in the agency model. The degree of friendship will determine ones’ prosocial preferences, which then affect managerial efforts and compensation. Our results show that, when players’ prosocial preferences are publicly known and when the CEO cares more about directors, he puts in more effort to increase the firm value. On the other hand, if directors care more about the CEO, then they are willing to reward a higher salary to compensate for the CEO’s effort cost. However, if directors were to know that the CEO cares about their welfare more and the CEO himself would have a high incentive to put in effort, then directors should reward the CEO less! This indicates that the CEO has an incentive to hide his prosocial preference. Our discussions on the two private information cases help explain players’ incentives of strategic hiding, by characterizing the pooling, separating and partial pooling equilibria in the signaling frameworks.

Suggested Citation

  • Ho, Shirley J. & Tsai, Yi Hao, 2020. "Building friendship with Boss: Strategic prosocial behaviors in the agency model," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 86(C).
    • Handle: RePEc:eee:soceco:v:86:y:2020:i:c:s2214804319303519
    DOI: 10.1016/j.socec.2020.101539
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    More about this item

    Keywords

    Prosocial; Signaling; Corporate governance; Agency model;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G3 - Financial Economics - - Corporate Finance and Governance

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