Principal-Agency Relations in Organizational Networks

Literature Review

In order to analyze relationships in organizational networks in the light of principal-agent theory, we should first stress out the meaning of the main term which will be used throughout this research paper. Organizational networks should not be considered as vertically organized hierarchies but rather as organizational forms. These forms use flexible, dynamic communication linkages that connect organizations and people into new entities that create products or services (Contractor, Wasserman, & Faust 2006). As Contractor et al. (2006) points out “these new forms are responsive and are constantly adapting as new links are added and dysfunctional ones dropped. Thus, the evolving, emerging network form is the organization”. Further on, according to Emirbayer and Goodwin (1994), organizational networks in the light of the relationships that comprise it, should be examined through relations in culture, agency, and social structure.

Now coming back to the connection between organizational networks and principal – agent theory it would be useful to analyze networks through its cooperating actors. This means that, individuals cooperate to undertake a certain process or employment. And here we come to the question of dealing with “agency costs”¹ that arise from such cooperation. Agency costs arise in any situation involving cooperative effort (such as the co-authoring of this paper) by two or more people even though there is no clear-cut principal-agent relationship (Jensen and Meckling, 1976).

Typical view of the agency theory from the economist’s side fails to recognize the agency problem in the scope of inter-human relationships. Criticism arises from the fact that agency theory should be approached from another perspective, and not only the economic one, observing the inter- and intra-organizational relationships in the light of also behavioral sciences. Organizational networks have been subject to sociological studies where it has been recognized as Emirbayer (1994) asserts, that network analysis will be one of the most encouraging new developments in the sociological discipline (as written in Homans 1986).

Networks have been recognized to be an important way of multi-organizational governance (Keith & Provan, 2007). Multi-organizational governance is gaining more and more attention as a way of substituting for market ineffectiveness where actors agree to transact for reasons other than just value (Fruin, 1998). Therefore, the added value of this paper will be in giving final propositions regarding agency relations within networks.