Choosing Constraints as a Third Solution to Agency

ABSTRACT The standard solutions to agency, incentive contracting and monitoring, are degraded by the frequency and the duration of the decisions affected. Decisions of low frequency and long duration are not effectively controlled by either monitoring or incentive contracting. For decisions of low frequency and long duration, constraining the firm's choices significantly reduces agency. Applying the theory, guidelines for choosing constraints are suggested, and propositions advanced. As one application, the mission statement is considered as a vehicle for embedding constraints. The theory is also investigated by examining existing recommendations for both the content and process of mission statements.