AMS Rev DOI 10.

1007/s13162-012-0024-7

Comparative insights into the governance problems of agency theory: the influence of institutional environment on the basic human tenets
Hannah S. Lee & David A. Griffith

Received: 20 December 2011 / Accepted: 18 March 2012 # Academy of Marketing Science 2012

Abstract Agency theory is used to explain many firm marketing activities. However, its assumptions are founded in characteristics of North American actors, particularly in the United States. As such, it is not surprising that work employing agency theory in other national contexts often fails to find support. Taking a comparative institutional approach, this article theorizes how the human assumptions and prescriptions of agency theory differ across countries by utilizing the three pillars (i.e., regulative, normative, and cognitive) set forth by institutional theory. In particular, attenuations of the human assumptions of self-interest, risk-aversion, and bounded rationality of agents are theorized to influence goal alignment, risk sharing, and information processing in the agency relationship and in turn, effect prescriptions of governance and contracting given by the traditional agency model. A series of research propositions are developed to provide insight into the contractual implications in the principal-agent relationship across different institutional contexts. The theoretical attenuations presented provide guidance for marketing academics and practitioners engaged in cross-national agency relationships. Keywords Agency theory . Institutional theory . Institutional environment . Principal-agent

Introduction As firms expand into global markets, relying on agents to serve on their behalf (e.g., franchisees, sales people, advertising agencies), marketing managers are increasingly finding it difficult to coordinate and govern these relationships. Agency problems (Christen et al. 2006) arise from the conflicting goals and differences in risk preferences of the transacting parties and from the information asymmetry that results from the division of labor (McCarthy and Puffer 2008; Eisenhardt 1989; Jensen and Meckling 1976). Originally developed from an economic framework, agency theory has been focused on identifying situations in which the principal and agent are likely to have conflicting goals and then describing the governance mechanisms that limit the agents self-serving behavior (Eisenhardt 1989, p. 59). Principal-agent theory, a cornerstone of the field of marketing in terms of both impact on the literature and practice (Bergen et al. 2003), has been widely used to explain managerial marketing issues (e.g., Lo et al. 2011; Ross et al. 1997; Singh and Sirdeshmukh 2000) as well as to analyze marketing activities of firms operating in overseas markets (e.g., Krafft et al. 2004). However, empirical research on the examination of agency theory in international contexts has failed to support efficacy of the theoretical predictions. Studies have found lower agency effects in non-Anglo-American contexts and argue that the design of governance systems in multinational enterprises simply may not be relevant in other countries to the degree that it is in the United States. For example, McCarthy and Puffer (2008) deem the self-interest-oriented assumptions of agency theory unsuitable for offering a rounded understanding of managerial systems that operate in contexts other than mature market-oriented economies (e.g., Russia). Similarly, the results of Pennings (1993) qualitative study on the pay-

H. S. Lee : D. A. Griffith (*) Department of Marketing, The Eli Broad Graduate School of Management, Michigan State University, N370 North Business Complex, East Lansing, MI 48824-1122, USA e-mail: chungh@bus.msu.edu e-mail: griffith@bus.msu.edu

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performance relationship (a key aspect for sales management), based on agency theory in the U.S. and European countries, indicate that U.S. employees understand compensation in different terms from their European counterparts in France and the Netherlands. Sharp and Salter (1997), when exploring the universality of agency theory in explaining escalation decisions for unprofitable capital expenditure projects (key for market entry and penetration strategies), found that while agency theory had strong explanatory power for project escalation decisions in North America (i.e., the U.S. and Canada), it provided little explanatory power in their Asian sample (i.e., Hong Kong and Singapore). The failure to find consistent results pertaining to agency theory across countries is not surprising due to cross-national dissimilarities. The international literature has primarily relied on the culturalist perspectives, drawing from Hofstede (1980, 2001), to explain cross-national dissimilarities (e.g., Bush et al. 2001, Dash et al. 2007; Hewett et al. 2006; Srnka 2004). However, scholars have recognized that broader institutional effects are at play (Bharadwaj et al. 2006; Dacin et al. 2008; Grewal and Dharwadkar 2002; Griffith 2010; Webb et al. 2011). For example, it has been argued that in order to make theoretical progress, researchers must tackle the harder and more interesting issues of how they [institutions] matter, under what circumstances, to what extent, and in what ways (Powell 1996, p. 297). The concept of institutional environment is more encompassing than the concept of culture in capturing country-level effects as it captures regulations and cognitive structures in addition to norms and values. An examination of the greater institutional effects of the past and present can complement cultural perspectives in our understanding of cross-national differences (Hillebrand et al. 2011; Zahra 2007). Institutional environments are exogenous to an exchange relationship and refer to macro-level aspects of society including the political and regulatory system, cultural norms, and cognitive beliefs and knowledge (Carson et al. 1999; Martin et al. 2011; Webb et al. 2011). Surprisingly, agency theory has been developed in relative isolation from the study of the institutional environment. As scholars have demonstrated that agency theory is not transferable across country contexts, we contend that there is a need to better understand the theoretical bounds of agency theory. Firms are increasingly hiring agents to perform its marketing functions at various stages of the marketing process (e.g., agents serve as a mode of operation in foreign markets, as representatives to promote products, for the generation of advertising context, as key inputs into the new product development process), and it is important to understand the differences in agent behavior and characteristics when operating across institutional environments. This article seeks to extend the application of agency theory in marketing by taking a comparative-institutional

approach, addressing the different outcomes in the theoretical prescriptions that are influenced by different institutional environments at the national level. Drawing from institutional theory, we theorize that assumptions of the self-interest seeking, risk-averse, and boundedly rational agent may be attenuated across countries whereas the same cross-institutional differences magnify the problems of moral hazard rendering governance and efficient contracting more difficult to achieve in multinational markets than in domestic markets. As such, the objective of this article is to contribute to the marketing literature by (1) theorizing the influence of the institutional environment on the human assumptions of agency theory, and (2) to discuss the academic and practitioner implications of the attenuation of the human assumptions on contracting problems. We begin with a review of agency theory. Next, the three pillars of institutional theory (Kostova 1997; Scott 2001) concerning the regulative, normative, and cognitive aspects of institutional environments are discussed and propositions are developed to consider how different institutional environments at the national level may attenuate agency theory presumptions and prescriptions, with respect to various marketing activities of firms. We then address the academic and practitioner implications of the attenuation of the human assumptions on contracting problems, providing suggestions for possible future theoretical and empirical research in field of marketing.

Agency theory Agency theory, having evolved beyond its original positivist domain is concerned with the goal conflicts between owners (shareholders) and managers of the firm, has been used by academics to study issues that arise from agency-like relationships (Bergen et al. 1992; Lo et al. 2011). The widespread use of agency theory can be attributed to the appeal of the model due to its realistic assumptions about people, organizations, and information (Eisenhardt 1989). An agency relationship is present whenever one party depends on another party to undertake some action on the principals behalf (Bergen et al. 1992) with a specific focus on the determination of the most efficient contract to govern the relationship. Agency problems arise from the information asymmetry that results from the division of labor and from conflicting goals and differences in risk preferences of the exchange parties (Jensen and Meckling 1976); principals are considered to be riskneutral whereas agents are risk-averse. Agency theory sets forward three main categories of assumptions (Eisenhardt 1989): human, organizational, and informational. Humans are assumed to be risk-averse and self-interest seeking and thus may behave opportunistically. We acknowledge that self-interest and opportunism are not

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isomorphic. Self-interest, however, can manifest as opportunism under certain conditions (Gomez-Mejia et al. 2005; Jensen 1994). Certain agents may pursue selfish benefits at a cost to the principal (Wright et al. 2001, p. 420). On the other hand, rational self-interest is argued to not necessarily exclude the notion of goal alignment with the principal (Gomez-Mejia et al. 2005), as the goal of the principal may be in the interest of the agent. Here, we assume that self-interest seeking behavior on the part of the agent may go against the principals goals (cause goal conflict) and increase costs for the principal. Bounded rationality is also a human assumption of agency theory. Although individuals intend to be rational in making the optimal choice, they are bound by imperfect information and capabilities (Shapiro 2005). Organizationally, it is assumed that partial goal conflict (self-interest and different risk perceptions) and information asymmetry exist between the principal and the agent. Information is assumed to be a purchasable commodity through expenditures on monitoring costs (Bergen et al. 1992). The problem of information asymmetry arises in the principal-agent relationship because agents, being in direct day-to-day control functions have detailed knowledge of its operations whereas principals neither have the access to this knowledge nor the ability to interpret information even if access was perfect (Doherty and Quinn 1999). Agency theory provides prescriptions of governance mechanisms (i.e., monitoring and compensation schemes) in attempt to resolve two problems that can occur in agency relationships. The first is the agency problem that arises because of conflicting goals and the inability of the principal to verify whether the agent has behaved appropriately. The second problem is the problem of risk sharing that arises when the principal and agent have different attitudes towards risk (Eisenhardt 1989). Assuming each party to be a utility maximizer (Jensen and Meckling 1976), acting in its own self-interest, the agent may not always act in the best interest of the principal as the agents and principals goals may not be identical or fully compatible. To safeguard his/her interests, agency theory states that the principal can either reduce the information asymmetry by investing in monitoring systems, thereby constraining the agents opportunity to shirk (Fama and Jensen 1983), or he/ she can structure the relationship to maximize goal alignment between the parties (Jensen and Meckling 1976). Agency theory focuses on the relative costs of these two solutions. Agency theory identifies two types of governance mechanisms: behavior-based compensation (and increased monitoring) and outcome-based compensation (Anderson and Oliver 1987; Celly and Frazier 1996; Lo et al. 2011). A behavior-compensation scheme pays the agent strictly on the basis of its activities. For instance, in a simple firmsalesperson relationship, a straight salary would be paid to the salesperson regardless of the outcome of the

salespersons activities. In contrast, an outcome based system calculates the performance of the salesperson against stated objectives and measures the outcome performance. Utilizing an outcome-based contract shifts the risk previously borne by the principal to the agent, and as agents tend to be risk-averse, a behavior-based system is preferred by the agent (Eisenhardt 1989). As previously mentioned, agency theory is applicable in relationships that reflect the basic structure of a principal and agent (Eisenhardt 1989). Agency relationships are pervasive in marketing because the essence of marketing is exchange, and the agency relationship isa significant component of all exchange transactions (Arrow 1985). For example, marketers of multinational corporations are heavily dependent on local facilitating agencies to perform some of the work involved in implementing marketing programs in an over-seas market (Logan 2000). These facilitating agencies are specialists whose services are contracted on a fee-for-service or commission basis (Bergen et al. 1992). Agency and risk sharing problems exist in a wide number of situations, such as firm-sales representative relationships (Eisenhardt 1988), franchisor-franchisee relationships (Anttonen et al. 2005; Doherty and Quinn 1999; Zachary et al. 2011), and firm-local advertising agency relationships (Spake et al. 1999). In each of these situations the firm wants to ensure that the marketing agent in question is not engaging in opportunistic behavior by not complying with the contract, but is limited in doing so due to high monitoring costs. Each of these contractual agreements involve an agency relationship that can be further complicated with cross-market differences (Kale and McIntyre 1991) and thus influence effective governance. Given the large number of agency relationships pertaining to marketing functions, it is not surprising that principal-agent theory has been considered a coherent framework to analyze managerial marketing issues (e.g., Lo et al. 2011; Ross et al. 1997) as well as to analyze marketing of firms operating in overseas markets (e.g., Krafft et al. 2004; Webb et al. 2011). Although the usefulness of agency theory in understanding principal-agent relationships is well founded in the extant literature (c.f., Bergen et al. 1992; Eisenhardt 1989), agency theory has not been found to be fully empirically supported when transferred into cross-national contexts. In the era of globalization of markets and the spread of U.S. business practices, it is important that we undertake further research into the generalizability of agency-theory based strategy prescriptions in different national contexts. To theoretically understand why researchers have found difficulty in extending agency theory to differing national contexts and to aid future marketing researchers in applying agency theory in such contexts, we draw on institutional theorys three pillars.

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Institutional environment and agency relationships Institutional theory attends to the deeper and more resilient aspects of social structure by examining similarities and differences across national institutional structures (Grewal and Dharwadkar 2002; Kostova 1999; Webb et al. 2011). Institutional theory considers the processes by which structures, including schema, rules, norms, and routines, become established as authoritative guidelines for social behavior (Scott 2004). Common to institutional theory is that regulative, normative, and cognitive systems are central elements of understanding institutions (Scott 2001). The three elements form a continuum moving from the conscious to the unconscious, from the legally enforced to the taken for granted (Hoffman 1997, p. 36) and from the coercive to normative and mimetic. A key insight from this theory is an acknowledgement of the institutional environmentthe environment consisting of political, cognitive, and sociological elements such as laws, rules, norms, cultural beliefs, and habits shared by relevant members (Handelman and Arnold 1999). Kostova (1999), in her exposition of institutional theory, suggests using the concept of a three-dimensional country institutional profile, distinguishing among the three component elements of a nation (i.e., regulative, normative, and cognitive) to capture the respective institutional characteristics of a national environment. Drawing from Scott (2001), this method of categorization delineates how a countrys legal system and government policies (constituting the regulative dimension), value system (the normative dimension), and the widely shared social knowledge (the cognitive dimension) affect business activity. By presenting the institutional context, the international marketing literature views the firm as embedded in country-specific institutional arrangements (cf., Griffith 2010; Webb et al. 2011). In this article, we employ the concept of country institutional profile (CIP) as a means to conceptualize the country level characteristics that affect organizational development (Kostova 1997, 1999). The three institutional pillars are distinguished in relation to the human assumptions of agency theory in explaining how and why the basic tenants of agency theory do not hold across countries. Accepting that there may be interrelations among the three dimensions of the institutional profile, we embrace Kostovas (1999) view by considering the regulatory, cognitive, and normative dimensions to be conceptually distinct. The three pillars of institutional theory are presented in the following section, and their theoretical implications on the human assumptions (as presented in Fig. 1 and detailed in Table 1) of selfinterest seeking behavior, risk aversion, and bounded rationality of agents are theorized. Most agency research defines efficiency from the principals point of view. The assumption is that the principal is the dominant party in the

relationship. Thus, an efficient contract is one that brings about the best possible outcome for the principal given the constraints imposed by the situation rather than one that maximizes the joint utility of both principal and agent (Bergen et al. 1992, p. 2). In this article, we focus on agent behavior (rather than looking at both agent and principal behavior) and when institutional factors influence agency theorys human assumptions. Regulative institutions The regulatory dimension of an institutional environment reflects the existing laws and rules in a particular national environment that promote certain types of behaviors and restrict others (Kostova 1999, p. 314) and directly relates to rule-setting, monitoring, and sanctioning activities (Scott 2001). Regulatory forces include the laws and political power that regulate individual and organizational action (Scott 2001), both of which are country-specific. Through rules, boundaries, laws, and regulations, the regulatory component aims to ensure stability and order in society (North 1990). A country with a strong rule of law is considered to have sound political institutions and a strong court system (Huang and Sternquist 2007). The rule of law is codified by a countrys governance infrastructure, representing the attributes of legislation, regulation, and legal systems that condition freedom of transacting, security of property rights, and transparency of government and legal process (Globerman and Shapiro 2003, p.19). The completeness of a nations regulatory system in governing contracts refers not only to the completeness of the legal framework, but also to how various laws are enforced (Greif 1997). Legal enforcement can range from thorough/predictable to sporadic/unpredictable. A strong regulative institution consists of detailed and well-codified laws and regulations and reliable enforcement of these laws. A regulative institution that lacks either aspect is considered to be weak, containing loopholes, and thus allows for circumvention. Regulative institutions and self-interest seeking agents Countries are often distinguished as having strong or weak regulative institutions (La Porta et al. 1998). Weak regulative institutions usually exist in environments of political and economic instability and are often resident in developing or emerging economies (Anttonen et al. 2005; Hoskisson et al. 2000). Weak regulative institutions are characteristic of incompleteness and loopholes in the legal system and lack enforcement of regulation which allows greater opportunity of self-interest driven behavior going unpunished. On the other hand, countries with strong regulatory institutions, have strong legal systems (detailed and well-codified rules) and reliable enforcement which

AMS Rev Fig. 1 Institutional pillars their influence of human assumptions of agency theory
Institutional Pillars

Regulative Pillar Regulative institution (codification of laws and enforcement)

Human Assumptions of Agency Theory

Normative Pillar Power distance Uncertainty avoidance Collectivism-individualism Masculinity-femininity

Self-interest Seeking Risk Aversion Bounded Rationality

Cognitive Pillar Education system (more broadly capitalist/more broadly socialist)

diminishes self-interest driven behavior on the part of the agent (as institutional pressures compel agents to abide to contracts and rules or face regulatory sanction). Agency theory has been theoretically developed and validated in countries characterized by strong regulatory instititions (McCarthy and Puffer 2008). While even in strong regulatory institutions managers face self-interest seeking behaviors from agents, the potential for self-interest seeking is significantly greater in weak regulatory institutions as the incompleteness of the regulatory framework and lack of enforcement of law allows agents engaging in such behaviors to proceed unchecked (e.g., in weak regulatory environments the penalties of contract violations are much less certain when compared to strong regulatory environments). Thus, it is proposed: P1a: Agents in countries with a weak regulative institution will exhibit higher levels of self-interest seeking behavior than agents in countries with a strong regulative institution.

P1b: Agents in countries with a strong regulative institution will exhibit lower levels of self-interest seeking behavior than agents in countries with a weak regulative institution. Regulative institutions and risk preferences of agents Agency theory is characterized by its emphasis on the different risk preferences of principals and agents (Eisenhardt 1989). Problems partly arise in agency relationships when the principal and agent have different risk preferences (Eisenhardt 1989). Risk preference refers to the degree of an individuals or firms preference for adventure rather than security (Arrow 1974; Pratt 1964). Agents are theorized to be risk-averse, preferring lower risk options at the expense of returns (Wiseman and Gomez-Mejia 1998). A risk-averse individual prefers security and therefore seeks some guarantee of the attainment of desirable outcomes or insurance against the occurrence of undesirable outcomes (Bergen et al. 1992).

Table 1 Pillars of institutions, associated dimensions, and their theorized influence of human assumptions of agency theory Pillars of Institutions Associated Dimensions Influence on Human Assumptions Self-interest Seeking Regulative Pillar Normative Pillar Codification of laws and enforcement Power distance Uncertainty avoidance Collectivism-individualism Masculinity-femininity Education system P1 P3 P4 P6 P8 P9 Risk-Aversion P2 P5 P7 P10 Bounded Rationality

Cognitive Pillar

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Research suggests that people vary widely in their risk preferences (MacCrimmon and Wehrung 1986). Slovic et al. (1982) conclude that perceptions of risk are likely to vary between different countries, dependent upon what legal opportunities existed for control and regulation of risk. The strength of the regulative institution that governs business relationships and operations, especially its efficacy in protecting the agent against opportunistic behavior on the part of the principal (e.g., overly restrictive and selfinterested provisions by a franchisor on a franchisee), effects the agents perception of risk and consequent decisions. Strong regulative institutions limit the principals selfinterest seeking behavior and reduce the risks of the agent being exploited or cheated in a business relationship by the principal. A strong regulative institution provides an institutional environment where economic agents are assured against the misbehavior of the principal and provided with peace of mind. When the regulative institution is weak, principals may have a stronger incentive and ability to cheat, leading to higher levels of uncertainty for the agent. Agents in weak institutional environments will be more cautious and perceptive of the risks that might follow, because they cannot rely on the regulative institution to buffer them against these risks. Thus, it is proposed: P2a: Agents in countries with a weak regulative institution will exhibit higher levels of risk-aversion than agents in countries with a strong regulative institution. P2b: Agents in countries with a strong regulative institution will exhibit lower levels of risk-aversion than agents in countries with a weak regulative institution. Normative institutions The normative component of the institutional environment refers to social norms, values, beliefs, and assumptions that are socially shared and are carried by individuals (Kostova 1997, p. 180). In Busenitz et al.s (2000) conceptualization of a countrys institutional profile, the normative element is operationalized by employing the concept of national culture. Through the embodied values, beliefs, and assumptions, national culture encourages and rewards the pursuit of some types of goals while discouraging and sanctioning others (Schwartz 1999). A number of cultural paradigms have been advanced in the literature and most have general similarities in underlying dimensions (Clark 1990). While numerous frameworks of culture have been offered (e.g., Clark 1990; Hofstede 2001; Triandis 1995; Trompenaars and Hampden-Turner 1998), the work of Hofstede (2001) presents an ideal conceptualization for the study of social institutions as it directly relates to the attitudinal and behavioral approach upon which exchange transactions (e.g., principal-agent relationships) are founded. Thus to consider

the normative component of the three pillars, we build on Hofstedes (2001) cultural dimensions. Hofstedes national culture framework is also implicitly addressed within prior research (e.g., Busenitz et al. 2000; Parboteeah et al. 2008) utilizing Kostovas (1997) approach to institutional theory (the approach applied here) and has been demonstrated to address the important factors in managing a salesforce across different national cultures (Fang et al. 2005) as well as international business-to-business relationships (e.g., Griffith et al. 2000). Consistent with Kostova (1997) and Hofstedes (1983) approach, we draw only on those cultural dimensions that theory suggests are most relevant to the issue under investigation, in this case those that relate to the human assumptions of agency theory. Power distance and self-interest seeking agents Power distance is defined as the extent to which less powerful members of institutions and organizations within a country expect and accept an unequal distribution of power as the proper way for social systems to be organized (Hofstede 2001). According to Hofstede (1980, 2001), in certain cultures, relatively large differences in power among members are accepted and tolerated more than they are in other cultures. This is reflected in both the values of the less powerful as well as the more powerful ones of the society (Singh 1990). Power distance influences the amount of formal hierarchy, the degree of centralization, and the amount of participation in the decision making process (Newman and Nollen 1996). In high power distance cultures, there are large differences in authority, salary, and privileges across employees with low levels of resistance. Subordinates, accepting of the power difference, are reluctant to express disagreement with their superiors (Singh 1990). More egalitarian norms are prevalent in low power distance cultures, where there is more consultation in decision making, and the differences in salary and perks across employees are minimized (Davis et al. 1997). Power is an important aspect of the relationship between a principal and agent. Davis et al. (1997) argue that high power distance cultures are conducive to the development of agency relationships, because they support and legitimize the inherent inequality between the principal and the agent. In high-power distance cultures, compliance with authority is expected as a social norm. In these cultures, agents (e.g., sales agents) are expected to comply with authority and as such will feel strongly compelled to do so because of this predisposition created by their national cultural values. Agents in high power distance cultures will a have a higher tendency to refrain from engaging in self-serving behavior. Alternatively, in low power distance cultures where sharing of power, less use of coercion, and more participative decision making is predominate, agents will be more likely to

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pursue equality, but also may engage more in self-interest seeking behavior (given their perceived equivalent status to the principal). Thus it is proposed: P3a: Agents in high power distance cultures will exhibit lower levels of self-interest seeking behavior than agents in low power distance cultures. P3b: Agents in low power distance cultures will exhibit higher levels of self-interest seeking behavior than agents in high power distance cultures. Uncertainty avoidance and self-interest seeking agents Uncertainty avoidance is defined as the extent to which a society feels threatened by uncertain and ambiguous situations and tries to avoid these situations by providing greater stability, establishing more formal rules, not tolerating deviant ideas and behaviors, and believing in absolute truths and the attainment of expertise (Hofstede 2001). The degree of comfort with ambiguity forms the core feature of the uncertainty avoidance dimension (Hofstede 1983). The level of uncertainty or risk that a society considers acceptable influences the assessment of the costs and rewards associated with self-interest seeking behavior (Doney et al. 1998). Lu et al. (1999) suggest that since individuals from high uncertainty avoidance cultures are more likely to be close rule/regulation followers, they are also more likely to place the organizations interest above their own self-interest than are individuals from low uncertainty avoidance cultures. Individuals in high uncertainty avoidance cultures show a high resistance to change (Kale and Barnes 1992) and thus are not likely to engage in selfinterested behavior. Acting in their self-interest jeopardizes the certainty of the continuation of the relationship (Doney et al. 1998) (as agents associate higher costs to being caught engaging in self-interested behavior). Conversely, agents in low uncertainty avoidance cultures do not fear uncertainty about the future and therefore are more likely engage in selfserving behavior, even if doing so risks the discontinuation of the relationship. Thus, it is proposed: P4a: Agents in high uncertainty avoidance cultures will exhibit lower levels of self-interest seeking behavior than agents in low uncertainty avoidance cultures. P4b: Agents in low uncertainty avoidance cultures will exhibit higher levels of self-interest seeking behavior than agents in high uncertainty avoidance cultures. Uncertainty avoidance and risk preferences of agents High uncertainty avoidance is associated with being risk averse, whereas low uncertainty avoidance manifests itself with greater risk taking (Nakata and Sivakumar 1996). Croziers (1964) classic study is illustrative of the effect of

uncertainty avoidance. Specifically, Crozier found that while French employees, with high uncertainty avoidance levels, prefer the certainty of rules, Americans, showing low uncertainty avoidance levels, prefer the discretion that goes with ambiguity. In a similar way, agents in high-uncertainty avoidance cultures prefer to have greater stability and tend to be risk-averse, not being proactive in taking on increased risk in the principal-agent relationship. Thus, it is proposed: P5a: Agents in high uncertainty avoidance cultures will exhibit higher levels of risk-aversion than agents in low uncertainty avoidance cultures. P5b: Agents in low uncertainty avoidance cultures will exhibit lower levels of risk-aversion than agents in high uncertainty avoidance cultures. Collectivism-individualism and self-interest seeking agents Collectivism-individualism is exhibited when a nations culture embraces either a social framework that focuses on individual interests or a tightly woven social fabric that elevates concern for in-group relationships above individual concerns (Hofstede 2001, 1980). Collectivism is characterized by a tight social framework in which individuals expect their in-group to look after them and, in exchange for that, are loyalty to the group (Hofstede 1980). In addition to emphasizing group welfare, collectivists value reciprocation of favors, a sense of belonging, and respect for tradition (Schwartz 1999). Alternatively, individualistic cultures value self-determination, have a high need for achievement, and tend to favor personal interests over group interests (Hofstede 1983). Research has found that business decisions in individualist cultures are based on calculated assessments whereas emotional ties play a bigger role in collectivistic cultures (Johnson and Droege 2004) and that distributors in more collectivist cultures tend to build stronger bonds with their manufacturers than distributors in more individualistic cultures (Griffith et al. 2000). Agency theory assumes self-interest. As such, it is not surprising that agency theory has been validated in individualistic cultures (e.g., Bloom and Milkovich 1998; Miller et al. 2002). However, agency theory predictions of agent and principal self-interest do not accurately reflect the underlying norms of collectivist cultures (Johnson and Droege 2004). Eisenhardt (1989) states that in highly socialized, clan-oriented organizations (Ouchi 1979), self-interest gives way to self-less behavior (Perrow 1986). In collectivistic cultures, the assumption of self-interest seeking behavior of agents should be mitigated as self-interested behavior runs counter to the we consciousness that predominates in collectivist societies (Doney et al. 1998). The likelihood that collectivists engage in self-serving behavior is low (when compared to individualists), because people hold group

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values and beliefs and seek collective interests (Ueno and Sekaran 1992). Deterrence mechanisms, such as social sanctions for pursuing individual interests, also curb self-interest by driving up the costs of self-serving behavior (Lindsay 1983). Because of the tendency of individuals in collectivist cultures to perceive themselves in groups and relationships rather than individual terms, and thus place the interests of the group ahead of themselves (Hofstede 2001; Kluckhohn and Strodtbeck 1961), agents will more likely suppress their self-interest and goals for the welfare of the group. Alternatively, societal norms in individualist cultures support self-serving behavior. People are expected to pursue their own self-interest and to maximize the gains from any opportunity that presents itself (Singh 1990; Ueno and Sekaran 1992). Thus, it is proposed: P6a: Agents in collectivistic cultures will exhibit lower levels of self-interest seeking behavior than agents in individualistic cultures. P6b: Agents in individualistic cultures will exhibit higher levels of self-interest seeking behavior than agents in collectivistic cultures. Collectivism-individualism and risk preferences of agents Collectivism also implies that the principal has goals that also consider the welfare of agents whereas agency theory generally considers that only the principals goals matter (Perrow 1986). Weber and Hsee (1998) propose a cushion hypothesis that predicts that a cultures position on the collectivismindividualism continuum will influence the objective level of risk that the members of that culture are exposed to, and will in turn influence their subjective risk-perception levels. Their explanation suggests that the close social network in collectivist societies serves as a cushion that would hold its members in case they fell and that this leads to lower the level of riskaverseness of the societies members (Hsee and Weber 1999). The higher level of reciprocity and trust in principal-agent relationships in collectivistic cultures (Griffith et al. 2000) provide such a social network on which the agent perceives that he/she can depend. As a consequence, the risk aversion of the agent diminishes as trust and reciprocity is built from a collectivist view of relationships. Thus it is proposed: P7a: Agents in collectivistic cultures will exhibit lower levels of risk-aversion than agents in individualistic cultures. P7b: Agents in individualistic cultures will exhibit higher levels of risk-aversion than agents in collectivistic cultures. Masculinity-femininity and self-interest seeking agents Masculinity-femininity refers to a cultures dominant values in regard to the job (success/money versus caring for others/

quality of life) and has substantive implications for marketing. It particularly focuses on the level of assertiveness in a culture and the extent to which those characteristics dominate (Hofstede 1980). Masculine cultures are characterized by valuing achievement, advancement to higher jobs, and material success. Much less value is given to the security of employment and cooperative colleagues (Singh 1990). On the other hand, feminine cultures emphasize interdependence, relationships, service, and harmony among individuals (French and Weis 2000). Masculinity is reflected in the merit-based opportunities for high earnings, recognition, advancement and rewards (Newman and Nollen 1996). Masculinity has been found to be positively correlated with individualism discussed previously (Hofstede 1983) and operates more consistently with the assumptions of agency theory (Johnson and Droege 2004). Agents in masculine cultures portray assertiveness and aggressiveness (Hofstede 1980), which are consistent with a tendency towards self-interest seeking behavior (Doney et al. 1998). They are more apt to place their selfinterests above others because they are driven by tough values of personal achievement and material success (Doney et al. 1998). However, the basic assumption of self-interest in agency theory does not hold in feminine cultures. Feminine cultures are less materialistic, less interested in personal recognition, and are more relationship oriented. Agents from feminine cultures are less likely to place their own selfinterest above others (Lu et al. 1999). Emphasis on the values of interdependence, relationships, and harmony would increase the likelihood that agents in feminine cultures have goals more closely aligned with the principals goals, mitigating self-serving behavior that are portrayed in more masculine cultures (Johnson and Droege 2004). Furthermore, agents in feminine cultures tend to value personal recognition and material success less than masculine cultures as well as place more focus on less aggressive/cooperative. Thus, it is proposed: P8a: Agents in masculine cultures will exhibit higher levels of self-interest seeking behavior than agents in feminine cultures. P8b: Agents in feminine cultures will exhibit lower levels of self-interest seeking behavior than agents in masculine cultures. Cognitive institutions The cognitive component of the country institutional profile reflects the cognitive structures and categories widely shared among individuals and represents the models of individual behavior based on subjectively constructed rules and meanings that dictate appropriate thought, feeling, and action (Wicks 2001). Within countries, knowledge sets become institutionalized, thus, becoming a part of a shared

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social knowledge (Busenitz et al. 2000). As Kostova (1999, p. 314) points out, cognitive programs such as schemas, frames, inferential sets, and representations affect the way people notice, categorize, and interpret stimuli from the environment and are characterized by a taken-forgranted element. An agent coming from different cognitive institutions and with different sets of expectations, are likely to interpret differently the various phenomena that occur in the external exchange environment. Consequently, this dimension focuses on the way the actors internal interpretive processes are influenced by the prevailing cognitive institution (Chelariu et al. 2006) which in turn, directly affect the attitudes and behaviors that agents bring to their place of employment. Inconsistencies between cognitive frameworks across countries can be captured by differences in education systems (Witkin and Berry 1975; Van Leeuwen 1978). Education plays an important role in the transmission of societal norms and beliefs from generation to generation (Turner 1997). Williamson (1979) argues that education systems serve as a national state apparatus for enshrining development, and can be classified as either broadly socialist or broadly capitalist. He noted that education systems are differentiated according to the values and social doctrines, consisting of political, economic, as well as social influence (Williamson 1979). The educational system is an apparatus for cognitive development and a social institution that provides socializing experiences which prepare individuals to act in society (Meyer 1977). In this article, following Williamson (1979), we argue that the cognitive structures developed in a countrys educational system will influence how people understand and interpret the role of businesses in the society and business relationships, being more broadly capitalist or more broadly socialist. Cognitive institutions and self-interest seeking agents Noreen (1988) argued that efficient contracting in agency relationships is best achieved through shared norms and ethical rules that reduce self-interest seeking behavior. Educational systems embed citizens with a set of foundation cognitions about self-serving behavior, and provide an understanding as to what entails self-serving actions (Lubatkin et al. 2005). The role of business systems in society differ across institutions. There are differences between countries with regard to knowledge levels, traditions and political beliefs towards the activities of businesses. More broadly capitalist educational systems argue for means of production being privately owned and operated for profit. The more broadly capitalist approach focuses on the socio-economic system as not just a way of earning money and making a living, but is also a way of thinking about social organization. This approach espouses the idea of individualism and that individuals have the right to economic freedom. Thus,

individuals educated in such a system tend to be free to act in their rational self-interest. A more broadly capitalistic education system refers to an education system that is embedded within societies that emphasize capitalism. Education systems in such countries aligned to the imperatives of the capitalist marketplace and learning are focused on economic freedom and capitalist accumulation (Barton 2001). In contrast, more broadly socialist education systems promote the broader social aspect of business activities and emphasize the benefits of business cooperation over pure profit-maximizing competition. Individuals recognize that cooperative relationships are effective in reaching joint objectives and good relations lead to better performance and understand that the objective of the firm cannot only be profit-seeking, without regard to its social implications. In a more broadly socialist education system, individuals are socialized to decrease the level of self-interest when engaging in business decisions. Thus, it is proposed: P9a: Agents in countries with a more broadly capitalist education system will exhibit higher levels of selfinterest seeking behavior than agents in countries with a more broadly socialist education system. P9b: Agents in countries with a more broadly socialist education system will exhibit lower levels of selfinterest seeking behavior than agents in countries with a more broadly capitalist education system. Cognitive institutions and bounded rationality of agents The cognitive pillar has its basis in social psychology (Kostova 1999). The shared conceptions people have on the nature of social reality and the schemes and frames they have decide how things are perceived (Scott 2001). Information processing systems are influenced by the schemas. Once formed, they are difficult to change and will influence the way stimuli are selected and information is processed (van der Molen et al. 1997). Models of bounded rationality are based on assumptions about limited time, resources and mental capacities. In agency theory, both principal and agents are assumed to be making their decisions optimally in view of their constraints (Arrow 1985). Simon (1957) suggests that economic agents employ the use of heuristics to make decisions rather than the rigid rule of optimization. Because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available through schemas. The bounded rationality condition in agency theory is treated as a general constraint and is constant across actors. However, Schoemaker (1990) highlights the variable nature of rationality among actors. According to Berger and Luckmanns (1967) theory of socialization, individuals develop a set of foundation cognitions (schema,

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belief structures, or mental templates) mostly through their primary socialization experiences with background institutions. It follows that, across individuals from different nations, bounded rationality retains rationality but within cognitive and cultural bounds (Hayakawa 2000). Thus, individual goals and preferences as well as cognitive processes are molded and guided by such norms, with individuals adopting simple modes of behavior that take advantage of such social and cultural norms and readily available heuristic solutions to problems. Cross-institutional socialization differences are evident in education systems which socialize individuals to think differently (i.e., different schemas). Different schemas result in different interpretations which affect evaluations, judgments, predictions, and inferences (Scott 2001). In a more broadly capitalist educational system, individuals are taught that the government is less involved in business and businesses operate for the purpose of its owners with the focal goal of increasing profit. In a more broadly socialist educational system, individuals are taught that businesses work jointly with others within a context where multiple stakeholders (i.e., employees, citizens, business partners) are considered in their decisions. These primary socialization differences impose a national bias on the way that individuals perceive and process information and in turn influence the solutions they construct in the business place as well. We posit that agents educated in a more broadly capitalistic education system are conditioned to thinking in a relatively narrower economic rationalizing and profit-optimizing way. Individuals trained in a more broadly capitalistic education system are inclined to rely on more concentrated cognitive frames and are thus more bound. On the other hand, individuals trained under a more broadly socialist education system are disposed toward considering a broader set of stakeholders in decision processes. They are less bound in the sense that they have been socialized through their educational system to view decisions as being embedded within larger social systems. Thus, it is proposed: P10a: Agents in countries with a more broadly capitalist education system will exhibit higher levels of bounded rationality than agents in countries with a more broadly socialist education system. P10b: Agents in countries with a more broadly socialist education system will exhibit lower levels of bounded rationality than agents in countries with a more broadly capitalist education system. Discussion Implications for contractual development A growing body of research has suggested that the principal-agent model does not adequately predict agent

behavior within the governance of agency relationships across nations with different regulative, normative, and cognitive institutions (e.g., Zahra 2007; Pederson and Thomsen 1997). Accordingly, we began this article by asserting that because of differences in national institutions, agency theorys governance model, based on the assumptions of self-interest seeking, risk-averting, boundedly rational economic agents, might be applicable to only the U. S. experience, and therefore unable to explain the principal-agent relationships that emerge elsewhere. Under agency theory, contracts are considered to be incomplete and subject to hazard because of the nature of individuals (i.e., selfinterest, risk aversion, bounded rationality), organizations (goal conflict among the principal and the agent), and the fact that information is typically distributed asymmetrically. Agency problems and risk-sharing problems arise and principals utilize various governance mechanisms (e.g., monitoring, behavior-based compensation, outcome-based compensation) to ensure the actions of the agents are aligned with the principal. The focus of agency theory is on determining the optimal contract, behavior versus outcome. We suggest that the institutional influence on the basic assumptions about individuals in agency relationships, in turn, affect organizational assumptions as well as contracting prescriptions given by the traditional agency model. We do not claim to be exhaustive in our efforts here. Rather we seek to inspire future efforts in this potentially rich area. Table 2 provides a summary of our discussion and offers several implications for marketing managers operating across national borders. The self-interest seeking assumption of agents is attenuated across institutions. Following the decrease of selfinterest seeking behavior on the part of the agent, the organizational assumption of partial goal conflict between the principal and agent is reduced. Specifically, the attenuation of the self-interest assumption is argued to be exhibited in nations with a strong regulative framework, normative institutions that curb such self-serving behavior (i.e., high power distance, high uncertainty avoidance, collectivistic, and feminine cultures), and cognitive institutions exhibited by more broadly socialist education foundations. As Eisenhardt (1989) demonstrates, with no or decreased levels of goal conflict, the agent will be likely to behave as the principal would like, regardless of whether his/her behavior is monitored. Goal alignment is brought about through the institutions that either suppress self-interest seeking behavior (Johnson and Droege 2004) through regulation or reinforce the value of avoiding conflict and attaining goal alignment itself. In these institutional environments, the motivational imperative and effectiveness of outcome-based contracting (aligning the goals of agent to the principals) would decrease. Issues between the principal and the agent reduce to risk-sharing considerations only and behavior-based

AMS Rev Table 2 The effects of institutional attenuations of the human and organizational assumptions on principal-agent governance

contracts become more efficient. As goals between the principal and agent are likely to be pre-aligned, the cost of monitoring the actions of the agent does not increase. For instance, in a franchisor-franchisee relationship where the franchisee is in from an institutional environment that suppresses self-interest seeking behavior, the franchisor can rely on a behavior-based contract without having to increase expenditures in monitoring the franchisee. However, in institutions where the franchisee may exhibit self-interest seeking behavior, the franchisor will have to make sure that the franchisee is not pursuing its self-interested motives to the detriment of the franchisor (e.g., stocking another firms goods, not adhering to corporate sanitary standards, diluting the corporate image and brand) by investing in monitoring systems and/or writing detailed contracts that stipulate specific behaviors which would increase operating costs to the franchisor. Although it is assumed that agents are relatively more risk averse than the principal under the principal-agent model, research demonstrates that risk preferences vary across nations as well as individual agents. Attenuation of the riskaverse agent assumption is found in countries with strong regulative systems that curb the self-interest seeking behavior of the principal which in turn, decreases the level of uncertainty for the agent (i.e., probability of being cheated by the principal), normative institutions reflecting low uncertainty avoidance tendencies, and collectivistic cultures

that cushion the agent from risk. The issue of risk arises because outcomes are only partly a function of behaviors. The resulting risk stemming from outcome uncertainty must be borne by someone. As the agent becomes increasingly less risk-averse, it becomes more attractive to pass the risk to the agent using an outcome-based contract in these institutional environments without increased costs. For example, in a manufacturer-foreign distributor relationship, the manufacturer can increase efficiency by easily relying on outcome contracts where the foreign distributor portrays low risk-averse tendencies. The less risk-averse distributor will be more willing to take on the uncertainties in outcome. On the other hand, firms may decide to opt a more salary-based compensation loaded with greater effort-output uncertainty so as to provide additional insurance to its distributors in countries where agents portray high risk-averse tendencies. Different cognitive institutions found across nations, which in part are influenced by normative institutions, increases the propensity of the actor to rely on heuristics influenced by national biases in processing external information, internalizing the information, and making decisions based on the information. Education systems influence the primary socialization of economic actors and thus prime agents. It embeds individuals with a set of foundation cognitions about acceptable self-interest seeking behavior and attitudes and behaviors brought to the workplace. Furthermore, the heuristics and cognitive processes that are

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formulated may further hinder rational decision making or enhance it. Bounded rationality is not constant across nations. This implies that agents from various institutions are more or less optimizing in contracting and decisions are not always made in a self-interest seeking nor in a utility optimizing manner. Agents rationalities are bound by the cognitive institutions of which they are a part. According to education systems that are more broadly capitalist or socialist, agents understand the role of business in society differently and, thus are socialized to focus on different cues in their decision making processes. As such, decisions in contracting may not always be done in an economic rationalizing manner. Differences in cognitions lead vary levels of information asymmetry between the principal and agent. Increased levels of information asymmetry lead to increased conflict. When hiring advertising agencies in more broadly socialist educational system institutional environments where the role of business is different from the home market, these advertising agents may be inclined toward considering a broader set of stakeholders in the decision process and conflicts can arise as to what the message or nuance of the advertisement will be. Thus, marketing managers need to be aware of the underlying social cognition and motivations of the agent in addition to economic motivations. Our propositions provide theoretical explanations for the previously mentioned inconsistent efficacy of agency theory in explaining governance of various marketing activities across countries and support the call to acknowledge the influence for the broader institutional context in which agency relationships reside. For instance, in Sharp and Salters (1997) study of the agency effect (i.e., the presence of an incentive to shirk and asymmetrical information) of project escalation behavior, the strong effect in North America and minimal explanatory power in Asia can be explained by the attenuation of the assumption of self-interest seeking agents and the assumption of partial goal conflict between the principal and the agent. The propositions also support the different employee reward systems and perceptions toward compensation in the U.S., France, and the Netherlands, as observed by Pennings (1993). The outcome-based compensation schemes are deemed inappropriate due to the French aversion for risk and unsuited to its motivational culture. Employees from U.S. firms expressed a strong belief in the motivational efficacy of outcome-based executive compensation systems, whereas their more feminine Dutch counterparts were more skeptical. These findings support the attenuation of self-interest seeking behavior that leads to the increased attractiveness of behaviorbased contracting. Future research agenda Understanding social embeddedness is important for comprehending differences in individual behavior. Clearly more

research examining the institutional effects on marketing operations and governance of agency relationships in marketing relationships is needed. We hope this research acts as a springboard for future research. We delineate some useful avenues for future research. More in-depth historical comparisons of differences in institutions would allow us to understand how the current institutions in nations have come about as well as how these institutions influence the assumptions of governance theories. A first step would be to empirically test the propositions advanced herein. Although we have discussed the institutional effects on human assumptions independently, interactions across assumptions may present a further challenge. Kostova (1999) originally takes a holistic view and incorporates all three pillars to formulate the countrys institutional profile. Thus in reality, each pillar is distinct but operates simultaneously to affect human behavior. For example, when an agent is from an institutional background characterized conjointly by low self-interest seeking behavior and high riskaversion, what type of compensation scheme is most effective? Beyond understanding the individual effects of institutional pillars on human assumptions, we see further challenges arising in attempting to comprehend the dynamics of assimilation of institutional effects. For example, researchers may also consider how institutions have evolved and are evolving. With globalization and the interchange of practices and norms, some aspects of institutions are assimilating across borders. Are individuals becoming more and more similar in their cognition and behavior? Does this decrease the complication of understanding the differential preferences of certain contracts? Furthermore, the propositions provided may change when factors of organizational/corporate culture are incorporated. An interaction between the institutional environment at the national level and the organizational level is expected to influence the governance of business relationships. Many organizations operate subsidiaries in foreign countries and these subsidiaries carry with them the institutional characteristics of the home country with them as reflected in corporate culture. Do these organizational cultures withstand the isomorphic pressures of the larger institutional environment? How does it effect the characteristics of the agent? Another research area can examine how the governance and contracting variables are effected when economic actors (i.e., the principal and the agent) from two different institutional backgrounds meet. Does an increased level of cultural sensitivity or similarity breed trust or relational effects that impact the governance of the relationship? Does high institutional distance between the principal and agent increase levels of conflict and increase the costs of monitoring and contracting?

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Conclusion In closing, the purpose of this article was to better understand how agency theorys human assumptions, experienced and formulated in a U.S. context, could be attenuated in different institutional environments for the understanding of marketing phenomena, thus building on the work of Webb et al. (2011). To engage this purpose, we employed institutional theorys three pillars to examine how the human assumptions of self-interest, risk-aversion, and bounded rationality are effected and further influence contracting prescriptions. Through this article, we highlight the importance of considering the institutional context of theories and providing a strong theoretical foundation for marketing guidance in the context of principal-agent relations. Anticipating differences in human assumptions, effective marketing managers should ready themselves for optimal contracting when assumptions are attenuated. Developing an understanding of how institutional environments influence the way individuals think and behave can help us address increasing international governance and contracting concerns. We hope the propositions presented here provide a framework and forum for future discussions and research.

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