Fairness, Character, and Efficiency in Firms

Agency problems beset firms and prompt opportunistic behavior by employees. Opportunistic behavior redistributes value, whereas cooperative behavior creates value. Firm-specific fairness norms typically promote the firm’s efficiency by increasing cooperation and decreasing opportunism. Firm-specific fairness norms best promote efficiency when supported by reputation effects and when the firm’s agents internalize the norms. People who internalize norms acquire good character. We will develop the concept of “good agent character,” by which we mean agent character that serves the firm’s profitability by embodying the firm’s fairness norms. Good agent character conveys an advantage to superiors and subordinates in forming cooperative relations with other people who can read character.