Chapter

Agency Costs and the Nexus of Contracts

M. W. Lau

in The Economic Structure of Trusts

Published in print January 2011 | ISBN: 9780199602407
Published online May 2011 | e-ISBN: 9780191725203 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199602407.003.0003
Agency Costs and the Nexus of Contracts

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This chapter examines Robert Sitkoff's agency costs theory of trust law, which is derived from Michael Jensen and William Meckling's theory of the firm. Sitkoff's account of trusts consists of two parts. The first part describes the trust as a nexus of contractarian relationships and the second part demonstrates how various trust laws reduce agency costs. This chapter argues that the trust is not a nexus of relationships; in fact, it is closer to a tripartite contract than to the web of relationships that Sitkoff describes. It then argues that most of the trust problems that Sitkoff identifies as being resolved by trust law are actually not agency cost problems, but mere conflicts of interests. Furthermore, it observes that there are many other non-legal factors influencing and incentivizing the various parties. These include social norms, reputation, and trustee remuneration. Finally, it argues that the misapplication of agency economics gives credence to apologists of the ‘trust deal’.

Keywords: Robert Sitkoff; Michael Jensen; William Meckling; agency costs; nexus of contracts; social norms; reputation; trustee remuneration

Chapter.  9660 words. 

Subjects: Trusts Law

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