Authority Relinquishment in Agency Relationships

Abstract

A key decision for the design of principal–agent agreements is how much control or authority the buyer (or principal) should be allowed to exercise in relation to the seller (or agent). Historically, agency theory has viewed exchange agreements as ranging from those in which the buyer has very high authority over the seller (formal authority) to those in which the buyer and seller are relatively independent so there is little or no authority relation (market exchange). However, some principal–agent agreements reverse the authority relationship usually assumed in agency theory by allowing the seller to exercise authority over the buyer. The authors study this unexplored type of agency agreement and refer to it as “authority relinquishment.” Using data collected from interviews with clients and guides on commercial high-altitude mountain expeditions, the authors identify conditions that make authority relinquishment likely. They also identify the benefits and drawbacks of authority relinquishment and compare them with the benefits and drawbacks of two frequently studied approaches to managing agency relationships—formal authority and authority decentralization.