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Within wardship, homoious hemins, and blind-spot relationships, perpetrators present victims with a convincing, ready-to-use principal—agent mould —a narrative for how their interactions will be structured—and adverse selection is intentionally embedded within this mould. The literature on agency theory is multidisciplinary and includes various approaches.

The game-theoretic approach to agency theory that we have so far discussed in this paper pertains primarily to the problem of asymmetric information and agency risks in market interactions Arrow , ; Knight ; Marschak ; Ross A separate, dominant approach to agency is as a positive theory for analysing economic activities, predominantly focused on corporate governance and ownership issues within the firm Alchian and Demsetz ; Fama ; Jensen and Meckling In this approach, a fundamental task of principals is to influence agents so that agency costs incurred by differing organizational goals and interests are limited Eisenhardt Bosse and Phillips ; Heath When information is analysed in agency-theoretic settings, irrespective of differences in streams and approaches, agents are defined as the informed party and principals as the uninformed one.

In the management and economic-organization literature, uninformed principals are commonly viewed as the dominant party as owners, shareholders, CEOs, etc. In the light of our discussion of consumer scams, however, we believe the matter of dominance over the terms and design of the principal—agent interaction requires critical treatment. The uninformed principal may control contract design formally , but the informal and implicit process of interaction may entail effective control by the informed agent, as in the context of the consumer scam.

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In other words, the agency-theoretic roles of principals and agents need not be associated with a fixed, explicit stance about dominance or control. Drawing on our agency-theoretic analysis of consumer scams, we believe this flexibility and revision should be extended beyond agency roles to agency authority and dominance. In other words, not only can agents take the role of employers, they can also exercise contract design control over the principal—agent interaction.

What would this flexibility around contract design entail for agency theory in the management and organization studies literature? Suppose the expert employee and her employer are facing a severe adverse selection problem.


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Who exerts control over the structure of this interaction? In the pre-contract stage, the potential employees may come up with ways to exert influence over contract design, given the prevailing adverse selection. In the market for high-tech services, for example, it is not uncommon for specialists to approach businesses or individual consumers and provide them with solutions to the problems they did not know they faced.

Take ads for apps or tools for managing information security, for example. These are in effect moulds and narratives for principal—agent relationships whereby the informed agent approaches the uninformed principal and offers to provide a service.

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Often the service recipient might not know she needs that service—the new updated Facebook app features, the novel Android pay function—until the service is offered to her. A more fluid stance about contract design and control over the terms of principal—agent interactions would enable us to analyse such settings using agency theory. This would help make systematic sense of a wider range of social and economic interactions using the lens of agency theory. It is noteworthy that one stream of research on agency theory where this relationship between asymmetric information though not adverse selection and contract design has received some attention is the literature on professional services Sharma Their high level of specialization and their social and economic privileges have long imparted professionals with authority and autonomy over the design of the client-professional principal—agent contract.

To be sure, professionals differ from scam perpetrators. This paper develops a theoretical perspective for studying the structure of information and the role of perpetrators as agents in consumer scams.

The multidisciplinary literature on consumer scams has thus far focused primarily on individual characteristics and specific scam contexts, and less so on the general structure of information in scam relationships. We have provided an agency-theoretic approach to the study of scam relationships and their adverse selection problems.

Recall the Nigerian general email scam mentioned at the outset of the paper. How might our proposed approach explain that scam? The victim is the uninformed principal and the email sender is the informed agent. The email sender prepares a principal—agent mould resembling wardship , and embeds it with adverse selection. Notice that the failures of judgment and observation in the structure of information occur before the agency contract commences adverse selection : the email sender is lying about her honourable intentions, but the victim cannot see through this before they send off their savings.

Although the principal victim is technically in charge, the impact of the adverse selection relationship renders this control merely symbolic. This wardship relationship entangles victims in severe adverse selection and provides opportunities to perpetrators for defrauding their victims. Beyond enhancing our understanding of the phenomenon of consumer scams, this paper has questioned a core assumption in agency theory.

While contract design is the formal prerogative of the principal in principal—agent models, in practice this role appears to be under the influence and guidance of the agent the scam perpetrator in consumer scams. This structure parallels the professional—client agency relationship, where the informed professional is an agent who acts on behalf of uninformed clients, and exercises considerable authority over the terms and structure of the interaction.

Some agency theorists have argued for a separation between agency roles and employment functions. In a similar vein, we question the automatic assignment of the function of control and authority to principals, as opposed to agents, in the principal—agent model. Our analysis of the consumer scam context has provided some evidence in support of this line of argument.

This revised stance about contract design has interesting implications for ongoing debates about the normative structure and justification of principal—agent relationships, for example in relation to the concept of authority e. Donaldson ; Heath Other core assumptions in this stream of agency theory are risk-aversion on the part of agents and the presence of uncertainty Arrow ; Dees We do not discuss these and other background conditions since our argument does not address them directly.

The agent has access to information that is not available to the principal Laffont and Martimort , pp. The principal faces moral-hazard problems if information is symmetric when the contract begins but becomes asymmetric afterwards. The agent takes an action unobserved by the principal within a given contract Laffont and Martimort , p. Consumer scams can involve both moral-hazard and adverse selection problems, but given our emphasis on the structure of information that facilitate scams, this paper will focus on adverse selection.

In contrast, we draw on observation and judgment to highlight structural features of information within adverse selection. Darby and Karni note that when contracting there are observation and judgment problems that make scams possible.

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They call these the experience and credence qualities of a good. However, their use of these concepts differs from ours in two ways. Second, the experience and credence qualities are relevant post-contract, but the focus of this article is pre-contract. To be clear, the failures of observation and judgment occur pre-contract and pertain to information, not behaviour.

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What they can sense with their eyes are phenomena, which are, at best, only representational of the noumenal realm beyond. Studies include personality traits such as fantasy proneness Langenderfer and Shimp ; Whitty , interpersonal influence susceptibility Ganzini et al. Less-informed investors are exploited by better-informed managers when the latter are quick to release good news and slow to release or actually conceal bad news about a firm Kane Similarly, investment fraud has been associated with newer securities that lack sufficient history to establish risk profiles Akerlof and Shiller , or more-established securities that trade too infrequently to gather sufficient statistics on them Evans et al.

Outside the investments literature, Kurland discusses how information asymmetry may lead to opportunism in the case of commissioned sales agents who have goals due to their incentive structure that may conflict with the principals customers they serve. What we propose as an interesting and distinct feature of contract design in victim-perpetrator agency interactions is a routine feature of two-player game-theoretic analyses.

There, in any given game, player 1 or player 2 may offer and design the contract Osborne and Rubinstein This would suggest that agency theory is not the most appropriate theoretical lens through which to analyse consumer scams. Rather, agency theory may not be as appropriate as game theory in explaining the scam phenomenon. We agree that there is much to learn about consumer scams through game theory.

In fact, the approach to agency theory we have been drawing upon is a simplified game-theoretic approach to a specific class of interactions: those between principals and agents. Reconsidering the assumption of contract design in the principal-agent model is thus appropriate given the existing theoretical links between the literatures on game theory and agency theory. Skip to main content Skip to sections. Advertisement Hide.


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Download PDF. Open Access. First Online: 07 March Introduction Would you believe the authors of this paper are former Nigerian generals who will soon contact you by email regarding 45 million dollars we had to leave behind when we fled the country? The interests of principals and agents are incongruent, and the motivations and characteristics of perpetrators agents cannot be adequately vetted by victims principals. Alternatively, victims may have access to relevant information regarding the perpetrator, but they may not be able to adequately evaluate the significance or relevance of this information judgment.

Depending on the specific consumer scam, observation, judgment, or both, can be relevant to the relationship. Principal can judge information Principal cannot judge information Principal can observe information Symmetric information Homoious Hemin Principal cannot observe information Blind-spot Wardship.

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Proposition 1 In the wardship relationship, where the principal cannot observe and cannot judge, adverse selection is severe. Proposition 2 In the homoious hemin relationship, where the principal can observe but cannot judge, adverse selection is moderate. Proposition 3 In the blind-spot relationship, where the principal cannot observe but can judge, adverse selection is moderate.

Bre-X, the phony gemstones, and the dating scam can now be compared in view of their relative adverse selection severity and the relative opportunities for perpetrators to carry out scams. Due to the failures in observing and judging information, adverse selection in wardship Bre-X is the most severe. The jewellery and dating scams exhibit relatively moderate levels of adverse selection, since they each involve only one of the failures of judgment or observation.

In these examples, in comparison with Bre-X stockholders, victims can successfully judge or observe the claims made by perpetrators. Since failures of observation and judgment each pose separate, unique challenges, we do not make a comparative statement regarding the adverse selection severity of homoious hemin and blind-spot structures. Implication for Agency Theory The literature on agency theory is multidisciplinary and includes various approaches. Personal fraud — ABS cat. Canberra: ABS. Accessed Dec 12, Akerlof, G. Phishing for phools: The economics of manipulation and deception.

Princeton: Princeton University Press. CrossRef Google Scholar. Alchian, A. Production, information costs, and economic organization. The American Economic Review, 62 5 , — Google Scholar. Aleem, A. Internet auction fraud: The evolving nature of online auctions criminality and the mitigating framework to address the threat. International Journal of Law, Crime, and Justice, 39, — Arrow, K. Uncertainty and the welfare economics of medical care. American Economic Review, 53 5 , — The economics of agency.