We provide a theory of the role of discretion in agency. We do so by extending the standard principal-agent framework to include complex information and trust. With these two new ingredients we find that: optimal agency contracts may be incomplete; they do not necessarily use all available,...

The demise of Enron, the largest bankruptcy in United States history, raised fundamental questions about the role of trust in agency relationships. The corporate collapse cast doubts on trust relationships between investors and corporate managers, between investors and investment advisors and...

We study the effect of globalization on the stock of trust in organizations. We present a simple model of endogenous trust and show that contrary to centralized hierarchies (pure limited liability firms), decentralized organizational structures (cooperatives) foster the emergence of trust. We...

Existing models of the principal-agent relationship assume the agent works only under extrinsic incentives. However, many observed agency contracts take the form of a fixed payment. For such contracts to work, the principal must trust the agent to work in the absence of incentives. I show that...