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Ex ante versus Ex post Governance: A Behavioral Perspective

  • Sven Hoeppner EMAIL logo and Christian Kirchner
Published/Copyright: May 21, 2015
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Abstract

Problems resulting from the delegation of competencies from one actor to another are at the heart of any governance discussion. While the conventional agency view strongly emphasizes that such problems can be solved ex post by monitoring and control strategies, the contract view proposes to tackle said problems ex ante through alignment of the agent’s incentives to those of the principal by, for instance, incentive contracts. In this paper, we introduce a behavioral perspective to this discussion. We will spotlight that the ex post strategies are behaviorally dysfunctional. The effect of self-serving and hindsight tendencies can hardly be overcome. Ex ante strategies, in contrast, suffer from problems of incentive design. However, proper incentive design can account for behavioral decision patterns. On this ground we argue that incentive contracting appears to be superior to monitoring approaches to solve the principal–agent conflict. To address behavioral problems in governance systems, we propose a counterintuitive shift of rule-making competencies: from public to private ordering for monitoring strategies and from private to public ordering for incentive contracting.

JEL: D01; D03; G34

In Memoriam Christian Kirchner. During the work on this project, Christian Kirchner past away suddenly. He was one of the great pioneers of the economic theory of law in Germany. Although this early and unfortunate demise of such a marvelous scholar is an indescribable loss for the field of law and economics and the academic landscape in general – not only in Germany, but also in Europe and beyond – his influence will live on through his students. This article was finished by the corresponding author in Christian’s spirit, which may most aptly be illustrated by one of his many quotes well known among his students: “Economic expertise furthers the understanding of the law.”


Acknowledgments

The authors would like to offer special thanks to Stephen Billion, Jef De Mot, Ben Depoorter, Alessio Pacces, Jörg Rocholl, Thomas Ulen and Christine Windbichler for very helpful discussions about the ideas put forward in this article. We further have received critical but nevertheless beneficial comments from conference participants at the 10th annual conference of the German Law and Economics Association (GLEA) and the 31st annual conference of the European Association of Law and Economics (EALE).

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Published Online: 2015-5-21
Published in Print: 2016-7-1

©2016 by De Gruyter

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