Stanford University Agency theory is an important, yet controversial, theory. This paper reviews agency theory, its contributions to organization theory, and the extant empirical work and develops testable propositions. The conclusions are that agency theory (a) offers unique insight into in- formation systems, outcome uncertainty, incentives, and risk and (b) is an empirically valid perspective, particularly when coupled with complementary perspectives. The principal recommendation is to in- corporate an agency perspective in studies of the many problems having a cooperative structure. One day Deng Xiaoping decided to take his grandson to visit Mao. "Call me granduncle," Mao offered warmly. "Oh, I certainly couldn't do that, Chairman Mao," the awe-struck child replied. "Why don't you give him an apple?" suggested Deng. No sooner had Mao done so than the boy happily chirped, "Oh thank you, Granduncle." "You see," said Deng, "what in- centives can achieve." ("Capitalism," 1984, p. 62) Agency theory has been used by scholars in accounting (e.g., Demski & Feltham, 1978), economics (e.g., Spence & Zeckhauser, 1971), finance (e.g., Fama, 1980), marketing (e.g., Basu, Lal, Srinivasan, & Staelin, 1985), political science (e.g., Mitnick, 1986), organizational behavior (e.g., Eisenhardt, 1985, 1988; Kosnik, 1987), and sociology (e.g., Eccles, 1985; White, 1985). Yet, it is still surrounded by controversy. Its pro- ponents argue that a revolution is at hand and that "the foundation for a powerful theory of or- ganizations is being put into place" (Jensen, 1983, p. 324). Its detractors call it trivial, dehu- manizing, and even "dangerous" (Perrow, 1986, p. 235). Which is it: grand theory or great sham? The purposes of this paper are to describe agency theory and to indicate ways in which organiza- tional researchers can use its insights. The pa- per is organized around four questions that are germane to organizational research. The first asks the deceptively simple question, What is agency theory? Often, the technical style, math- ematics, and tautological reasoning of the agency literature can obscure the theory. More- over, the agency literature is split into two camps (Jensen, 1983), leading to differences in interpretation. For example, Barney and Ouchi (1986) argued that agency theory emphasizes how capital markets can affect the firm, whereas other authors made no reference to capital markets at all (Anderson, 1985; Demski & Feltham, 1978; Eccles, 1985; Eisenhardt, 1985). The second question is, What does agency theory contribute to organizational theory? Pro- ponentes such as Ross (1973, p. 134) argued that "examples of agency are universal." Yet other scholars such as Perrow (1986) claimed that agency theory addresses no clear problems, and Hirsch and Friedman (1986) called it excessively narrow, focusing only on stock price.

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