Constraining a Principal’s Choice: Outcome versus Behavior Contingent Agency Contracts in Representative Negotiations

Individuals and groups regularly conduct negotiations through an agent or a representative. One common example is homeowners who sell their properties through real estate agents. Pragmatically, the decision to employ an agent often stems from the belief that an agent is capable of generating a settlement that is superior to that which a principal could negotiate alone (Fisher and Davis 1999; Sharma 1997). However, in making the decision to use an agent, principals must also consider the costs associated with the agency relationship. These costs may include both the cost of the contract itself, such as the agent’s remuneration (Bazerman et al. 1992; Valley et al. 1992), and the potential cost of agent opportunism, such as the agent’s self-interested behaviors (Eisenhardt 1989; Jensen and Meckling 1976; Wright, Mukherji, and Kroll 2001).

To date, research on representative negotiations has developed from two predominantly independent streams. First, agency theory (Eisenhardt 1989; Jensen and Meckling 1976; Wright, Mukherji, and Kroll 2001) has been used to describe the forms of agency contracts from which a principal may choose. This choice is predicated on maximizing the principal’s gains and minimizing the costs of employing an agent (Bazerman et al. 1992; Conlon and Parks 1990; Gillespie and Bazerman 1997; Valley et al. 1992). The second research avenue addresses the circumstances in which principals may depend on an agent to generate negotiated settlements. This dependence often stems from situational constraints or limitations in the principals’ abilities and/or motivation to negotiate alone (Lax and Sebenius 1986; Rubin and Sander 1988).

The discussion to follow addresses these two perspectives in tandem. To this end, it is proposed that a principal’s choice of agency contract may be constrained by the circumstances that initially led the principal to seek out an agent’s services. For instance, principals who lack any knowledge of the negotiation process or the issues under contestation may require agents to better their settlements (Rubin and Sander 1988). These principals must understand, however, that from an agency theory perspective, the feasibility of holding the agent accountable for her or his behaviors becomes highly limited without knowledge of what behaviors to expect (Eisenhardt 1989).

Two forms of agency contract are discussed here. The first is behavior contingent, in which the agent is remunerated for the actions he or she takes (e.g., a noncommissioned sales person, a human resource manager who is responsible for making job offers, or a divorce lawyer who channels communications between separating spouses). The second is outcome contingent, in which the agent is remunerated for the negotiated settlement (e.g., a commissioned real estate agent or a lawyer who is given a percentage of punitive damages awarded by a court). Agency theorists argue that by specifying the behaviors or outcomes that are expected of the agent, the agent is made aware of how he or she will be compensated (Bartunek, Benton, and Keys 1975; Benton 1975; Lax and Sebenius 1991). Accordingly, the agent is likely to extend greater effort in the interests of the principal (Eisenhardt 1989; Jensen and Meckling 1976).

Although the present discussion addresses the two contract forms independently, it is recognized that principals may generate contracts that include both outcome and behavior contingent compensation. In these contracts, principals may consider how the circumstances that led to the use of an agent may also constrain the proportion of each contingency that can be written into the contract.

Previous discussions of how a principal may be dependent on an agent (Lax and Sebenius 1986; Rubin and Sander 1988) and the tenets of agency theory (Eisenhardt 1989; Jensen and Meckling 1976; Wright, Mukherji, and Kroll 2001) are integrated into this article to identify and examine agency contract choices. To this end, a brief synopsis of agency theory and its applications to representative negotiations (Conlon and Parks 1990) is provided.

Four circumstances — expertise, emotional strain, principal’s preferred engagement strategy, and zone of possible agreement — are then identified in which a principal who negotiates through an agent is likely to garner positive returns with respect to integrative value (Filley 1975; Pruitt 1981, 1983), appropriated value (Pruitt and Rubin 1986), and the capacity to protect his or her relationship-based interests (Fisher, Ury, and Patton 1991; Savage, Blair, and Sorenson 1989; Thompson 2001). Two further circumstances — communal relationship norms and repeated interactions — are identified in which negotiating through an agent may generate negative returns with respect to the principal’s relationship-based interests (Fisher, Ury, and Patton 1991; Savage, Blair, and Sorenson 1989; Thompson 2001). Testable propositions are developed to specify how each of the six circumstances influences the principal’s choice between behavior and outcome agency contract forms. Implications of the discussion are then explored with recommendations for future research.

Throughout this essay, the term “agent” refers to an individual appointed by a principal and given the authority to act or negotiate on the principal’s behalf. The agent is subsequently remunerated by the principal for the services that the agent renders. An agent is expected to be a fiduciary third party, and therefore act only in the interests of a single principal or constituent group (Reuschlein and Gregory 1979). Thus, mediators and arbitrators are excluded from this definition. Although an agent may serve as the primary negotiator, the following discussion assumes that the agent is not authorized to bind the principal to a final settlement without the principal’s permission (Karambayya and Brett 1989; Mo 1995).

The primary focus of agency theory is the identification of circumstances in which a behavior contingent contract between the principal and agent would generate superior results to those that would be achieved using an outcome contingent contract (or vice versa). The choice between contract forms is intended to minimize the potential for an agent to exhibit self-interested behaviors and maximize the probability of an optimal settlement for the principal (Eisenhardt 1989; Jensen and Meckling 1976; Williamson 1975; Wright et al. 1996; Wright, Mukherji, and Kroll 2001).

Under ideal conditions, a principal is assumed to have the information needed to create a behavior contingent contract and subsequently monitor the agent’s behaviors during the transaction. By monitoring the agent’s behaviors, the principal may curb the possibility of the agent engaging in opportunistic behaviors (Conlon and Parks 1990; Eisenhardt 1989; Sharma 1997). A further benefit of a behavior contingent contract is that the level of success is evaluated relative to the agent’s behaviors and decisions along the way rather than by the settlement alone. Accordingly, the agent is forced to take on less risk and, in turn, is likely to require less compensation from the principal (Parks and Conlon 1995).

In addition to minimizing the costs associated with negotiating through an agent, behavior contingent contracts may result in higher quality settlements because the volume and frequency of information sharing between the principal and agent about the negotiation process and the principal’s interests are increased (Benton 1975; Conlon and Parks 1990). This enhanced communication results in better collaborative efforts of the principal–agent team (Parks and Conlon 1995). Moreover, behavior contingent contracts may motivate agents to make decisions that can be easily justified (Lerner and Tetlock 1999; Snyder, Bruck, and Sapin 1962). In turn, this may reduce the occurrence of unwanted agent behaviors such as escalating commitment to a failing course of action (Eisenhardt 1989; Hermann and Kogan 1968; Kirby and Davis 1998; Kogan, Lamm, and Trommsdorff 1972; Tosi, Katz, and Gomez-Majia 1997).

Under less-than-ideal conditions, agency theory posits that a principal may not have the requisite knowledge or ability to monitor the agent’s behaviors and thus may be unaware of exactly what the agent is doing (Eisenhardt 1989). In this situation, agents may have an opportunity to hide behaviors or to misrepresent their skills to the principal (Eisenhardt 1989; Gillespie and Bazerman 1997). Short of expending resources to obtain or generate the information needed to monitor the agent’s behaviors, the principal may initiate an outcome contingent contract (Eisenhardt 1989; Jud and Frew 1986; Sebenius 1992; Sharma 1997). By holding the agent responsible for the final settlement, the principal may align the goals of the agent with his or her own.

Judging the quality of negotiated settlements, however, can be a highly complex undertaking. In short, a principal who is unable to identify and evaluate an agent’s behaviors may be unable to determine whether a negative settlement was the result of an inappropriate or irrational decision by the agent (Ross 1973; Sharma 1997).

A further complication in outcome contingent contracts is that an agent tends not to benefit from a uniform compensation rate to the same extent as the principal (Bazerman et al. 1992). That is, as the value of the settlement increases beyond a minimally acceptable deal, the agent must trade off the compensation that she or he would receive from a more optimal settlement with the opportunity costs of continuing negotiations ( Jud and Frew 1986). In essence, a high settlement takes more time than its worth to the agent. Moreover, an agent operating under an outcome contingent contract takes on a greater amount of risk because they assume responsibility for the impact of circumstances beyond the agent’s control (Conlon and Parks 1990; Eisenhardt 1989; Jensen and Meckling 1976; Sharma 1997). As a result, the agent is likely to request increased compensation. Despite these limitations, if the cost of obtaining or generating the knowledge needed to effectively monitor the agent’s behaviors is greater than the cost of compensating the agent for the negotiated settlement, then an outcome contingent contract remains a viable choice.

Although agency theory originated from an economics tradition that emphasized the need to make rational choices toward maximizing utility (Ross 1973), recent refinements of the theory have addressed the noneconomic predispositions of the agent and the principal in establishing a viable contract. Specifically, in their writings on the subject, Kathleen Eisenhardt (1989) and Peter Wright, Amanda Mukherji, and Mark Kroll (2001) have relaxed the assumption of goal asymmetry between the principal and agent. As not all behaviors are based on self-interest, relaxing this assumption suggests that as the goals of the principal and agent become more alike, behavior contingent contracts become more appropriate. Similarly, the assumptions of a risk-averse agent and a risk-neutral principal have been relaxed to acknowledge that there are individual differences in risk preferences (Hambrick and Mason 1984; MacCrimmon and Wehrung 1986). Accordingly, as agents become more risk averse, they may be less willing to accept an outcome contingent contract without greater compensation. On the contrary, risk-averse principals may prefer outcome contingent contracts because they transfer much of the risk to the agent. Kathleen Eisenhardt (1989) also suggested that the attractiveness of outcome contingent contracts is reduced to the extent that: (1) appropriate behaviors for an agent can be specified in advance (programmability); (2) outcomes are difficult to measure; and (3) the tenure of the agency relationship is lengthened.

In the next section, four conditions in which employing an agent may improve a settlement are discussed in terms of how they affect a principal’s choice between contact forms. Consistent with Eisenhardt’s (1989) criticism of a purely economics-based agency theory, each of the four conditions addresses a noneconomic element of the principal–agent transaction that is likely to influence the viability of outcome and behavior contingent contracts.

Innumerable variables and circumstances may result in an agent generating greater substantive gains relative to the costs of employing the agent. Consequently, the circumstances discussed in this article are not intended to be exhaustive of all possible influences of principal dependency, but rather a representation of those most likely to have a substantial impact on negotiated settlements and the interprincipal negotiation relationship. Moreover, these four circumstances are considered because of the constraints that they place on the agency contract choices available to the principal.

To achieve personal goals or targets, individuals require a degree of knowledge, skill, and/or ability (Latham, Locke, and Fassina 2002). Accordingly, it is not surprising that Jeffrey Rubin and Frank Sander (1988) described the absence of negotiation expertise as one of a principal’s foremost factors of dependency for generating and appropriating value in negotiations. Agency theorists put forth a similar argument, suggesting that a principal’s lack of expertise is instrumental in the principal’s initial decision to employ an agent and subsequently the principal’s choice between an outcome and behavior contingent contract (Eisenhardt 1989; Wright, Mukherji, and Kroll 2001).

If negotiation expertise is assumed to be multifaceted, as has been suggested by negotiation researchers (e.g., Rubin and Sander 1988; Sharma 1997), then not only is a principal’s lack of expertise instrumental in establishing viable agency contracts, but so too is the type of expertise that the principal is lacking.

The first of three facets to be discussed here is information expertise, which involves a tangible familiarity with (i) the contested subject matter and (ii) the bargaining process (Sharma 1997). Expertise regarding the contested subject matter may include a real estate agent’s detailed knowledge of property valuation (Jud and Frew 1986) or a tax attorney’s specific knowledge of the current codes of tax law (Mnookin, Peppet, and Tulumello 2000).

In addition to content knowledge, information expertise also includes knowledge of the negotiation process. More specifically, how the negotiation is prepared and conducted. For example, a real estate agent’s knowledge of how to generate buyers’ interest (e.g., open houses, flyers) and alternative means by which to receive offers to purchase (e.g., auctions, written offers). Information expertise enables a negotiator to quickly and accurately value the contested issues; prepare appropriately for the negotiation; generate settlement alternatives; and initiate practical concessions (Rubin and Sander 1988; Sharma 1997). Note that negotiation experience is not necessary to gain information expertise. A professional athlete, for example, may understand the process by which his or her contract is negotiated without having actually negotiated a contract previously.

The second facet of expertise is a negotiator’s experience, which involves a detailed familiarity with negotiation rituals such as norms of engagement, specific bargaining contexts, customs, communication styles, and procedures (Rubin and Sander 1988; Sebenius 1992; Sharma 1997; Valley et al. 1992). In short, experienced agents may have more highly developed and refined negotiation skills than novice principals (Rubin and Sander 1988). Experience is likely to expedite and enhance the integrative and distributive processes of negotiation by doing away with superfluous communication and unfeasible settlement alternatives. Real estate agents, for example, may filter a principal’s unrealistic bids or transaction clauses prior to interacting with another agent (Jud and Frew 1986).

The third facet of expertise is a negotiator’s connections to social and/or professional networks (Downs and Rocke 1994; Rubin and Sander 1988). Often associated with experience, these connections enable a negotiator to generate settlement options typically unavailable to a principal external to the networks (Bazerman et al. 1992; Downs and Rocke 1994; Rubin and Sander 1988; Salacuse 1999; Valley et al. 1992).

For this discussion, information expertise is considered to be distinct from the remaining two facets, as information is often considered a financially acquirable commodity (Larson 1977). The latter two facets are jointly treated as proficiency expertise, as both are acquired through negotiation practice rather than through financial means. Conceptualizing expertise as a combination of information and proficiency imparts one of three levels of expertise on a principal: (1) complete information and proficiency; (2) high information but low proficiency; or (3) no expertise. Proficiency is unlikely to exist without information.

In the absence of information expertise, behavior contingent contracts are increasingly difficult to generate and monitor (Eisenhardt 1989). Specifically, principals with little or no knowledge of the negotiation process (e.g., how a professional athlete’s contract is negotiated, how a home is sold) may be unable to write viable behavior contingent contracts, as they lack the knowledge to accurately specify and monitor behaviors that are required of the agent (Eisenhardt 1989). Moreover, a principal who lacks knowledge of the contested issues has no way of confirming the agent’s valuation of the contested issues and the concessions made by the agent (Eisenhardt 1989). It is therefore proposed that the absence of information expertise constrains a principal’s choice of agency contract. Specifically:

Although principals with complete information and proficiency expertise — or who lack proficiency expertise — are capable of negotiating alone, they may negotiate through an agent for other reasons. Instances such as these are analogous to Eisenhardt’s (1989) complete information condition in which agents are not employed for their information expertise, but rather solely for their proficiency expertise or skills as a negotiator. Under these conditions, agency theorists posit that a behavior contingent contract should be preferred over an outcome contingent contract to minimize the risk of agent opportunism (e.g., agents who do not use their professional networks to the extent to which they promised their principals).

The strategies, tactics, and behaviors that lend to the successful appropriation of value in distributive bargaining differ from those central to value creation and the development of interprincipal relationships typically associated with integrative negotiations (Lewicki et al. 2003; Walton and McKersie 1965). Although it is recognized that integrative value must eventually be appropriated by negotiators, many of the behaviors that are effective in appropriating value hinder integrative processes (Fisher, Ury, and Patton 1991; Lewicki et al. 2003; Tinsley, O’Connor, and Sullivan 2002). As we will see, a principal’s sense of emotional strain or preferred engagement strategy may lead the principal or the principal’s counterpart to engage in behaviors that impede the creation of value or appropriation of value as well as hinder the development of the bargaining relationship (Gilson and Mnookin 1994; Rubin and Sander 1988). As a result, principals may choose to negotiate through agents to mitigate the potential adverse effects of their own behaviors that are motivated by their emotions or engagement strategies.

Rubin and Sander’s (1988) discussion of the agent appointment decision proposed that emotionally entangled negotiators might choose to negotiate through an intermediary to decrease the risk of an impasse and increase the potential for appropriating value. Nevertheless, the intersection of emotions research and the mixed motive environment of negotiations have initiated a stream of research, suggesting that a strategy of emotional detachment by use of agency may be overly simplistic (van Kleef, de Dreu, and Manstead 2004). This emergent stream of research has begun to address the tensions created by the intrapersonal and the interpersonal effects of emotions (cf. Morris and Keltner 2000). Intrapersonal effects refer to the processes by which a principal’s emotions influence his or her own behaviors. Interpersonal effects, in contrast, refer to the process by which a principal’s emotions influence his or her counterpart’s behaviors.

Researchers addressing the intrapersonal effects of emotions have consistently demonstrated that positive emotions tend to be associated with cooperative strategies (Forgas 1998); a greater capacity to generate integrative solutions (Allred et al. 1997; Carnevale and Ilsen 1986); the initiation of fewer contentious tactics (Carnevale and Ilsen 1986; Kramer, Newton, and Pommerenke 1993); and a reduction in the escalation of commitment (Kumar 1997). Negative emotions, in contrast, tend to evoke retaliatory behaviors (Allred 1999); reduce joint gains; decrease interest in a counterpart’s interests; diminish the negotiators’ willingness to engage in future interaction (Allred et al. 1997); and lead to escalation of commitment (Kumar 1997). Thus, the intrapersonal effects of negative emotions tend to undermine the elements necessary for generating joint benefit (Kemp and Smith 1994; Laubach 1997; Pruitt 1981) and protecting or enhancing relationship-based interests (Gouldner 1960; Thompson 2001).

The interpersonal effects of emotion are also likely to have implications for the decision of whether or not to employ an agent (Adler, Rosen, and Silverstein 1998; Barry and Oliver 1996; Davidson and Greenhalgh 1999). For instance, emotions tend to evoke reciprocal emotions in others (Keltner and Kring 1998), signal information about one’s intentions (Ekman, Friesen, and Ellsworth 1972; Putnam 1994), and define a standard of behavior in others (Averill 1982; Klinnert et al. 1983). Principals who express positive emotions are likely to concede greater value than principals who express negative emotions (e.g., Bateman 1980; de Dreu et al. 1994; Pruitt 1981; Pruitt and Carnevale 1993; Smith, Pruitt, and Carnevale 1982). Consequently, the interpersonal effects of positive emotions might undermine distributive processes.

Similar to emotional strain, a principal must consider the mixed motive nature of negotiation when evaluating the fit of his or her preferred engagement strategy.

A competitive engagement strategy is likely to undermine the process of value creation, because it tends to signal the potential for distributive and contentious tactics (Tinsley et al. 2002). Consequently, integrative potential is lost because both the principal and the counterpart tend to close lines of communication (Kemp and Smith 1994; Pruitt 1981; Pruitt and Lewis 1975), focus on short-term objectives, try to maximize their own outcomes ( Johnston 1982), expend modest effort trying to understand the needs of the other side (Fisher, Ury, and Patton 1991), and generate little shared trust (Olekalns and Smith 1999).

A principal’s relationship-based interests may also be undermined by a competitive engagement strategy or distributive reputation, because negotiators who have no expectations of future exchanges tend to be exploitative of each other (Marlowe, Gergen, and Doob 1966) and less cooperative (Ben-Yoav and Pruitt 1984). A collaborative engagement strategy, on the other hand, may undermine a principal’s appropriation of value, because integrative schemas tend to be associated with cooperation, the sharing of information, and the goal of satisfying both parties’ needs ( Johnston 1982; Lewicki et al. 2003); each of these behaviors may be potentially exploited by a counterpart seeking to maximize his or her own appropriated value (O’Connor and Carnevale 1997).

Although the preceding discussion identifies circumstances in which the employment of an agent may mitigate the adverse effects of a principal’s behaviors stemming from an emotional strain or an inappropriate engagement strategy, it does not address the question of whether a behavior or outcome contingent contract should be preferred in these circumstances.

Recall that a principal’s choice to use a behavior contingent contract not only depends on the principal’s capacity to specify appropriate behaviors in the contract, but also depends on the principal’s capacity to evaluate the agent on said behaviors. Thus, in answering the question of agency contract choice, one must consider the role that emotions or preferred engagement strategy may have on writing and evaluating a behavior contingent contract.

According to affect-as-information theory (Clore 1992; Schwarz 1990; Schwarz and Clore 1983), people use their emotions to guide their judgments and choices (Damasio 1994). Stated differently, emotions tend to trigger specific actions or choices (Frijda 1986; Frijda and Mesquita 1994). Anger, for instance, triggers competitiveness. Even if people are made aware of their predisposition toward certain actions and choices stemming from their emotions, they often underadjust (Strack 1992; Wegener and Petty 1997).

In writing behavior contingent contracts, therefore, principals are likely to specify behaviors that are consistent with their current emotions or preferred engagement strategies. As a result, an agent becomes constrained in his or her capacity to engage in the behaviors that are appropriate to the bargaining context (e.g., cooperative problem solving in integrative negotiations). Without the freedom to engage in these behaviors, the agent is unlikely to generate a satisfactory result for the principal (Fisher and Davis 1999).

Evaluating how well an agent performs behaviors specified in the agent contract may be contingent upon whether the behaviors are analytic or nonanalytic in nature (Williams 1992). Analytic behaviors require limited cognitive processing by the principal to evaluate (e.g., the number of open houses that were held). Nonanalytic behaviors require the principal to subjectively evaluate performance quality based on observations of the agent (Williams 1992). For instance, a principal may judge the extent to which the agent made use of his or her professional networks.

A principal’s emotional strain or preferred engagement strategy may diminish the principal’s capacity to effectively and objectively evaluate an agent’s nonanalytic behaviors. Specifically, individuals are predisposed to use their own conception of effective performance as a reference when evaluating the performance of others (Borman 1987). Furthermore, behaviors that are observed to be contradictory to the individual’s initial conception of performance are more salient than confirmatory observations (Hastie and Kumar 1979; Srull 1981). Thus, if an agent engages in behaviors that are necessary given the type of negotiation, the principal may evaluate these behaviors negatively because they are inconsistent with the behaviors that the principal would engage in if negotiating alone. An agent negotiating under these circumstances is placed in a situation in which the elements outside his or her control — the principal’s perception of appropriate behavior — are systematic, thereby limiting the behaviors available to the agent to conduct the negotiation effectively.

The reduction in a principal’s capacity to accurately specify appropriate behaviors for the agent and to properly evaluate an agent’s behaviors under the influence of emotional strain and an adherence to inappropriate engagement strategies compromises the viability of behavior contingent contracts. This brings us to the second proposition:

Further to Proposition Two, principals who are experiencing negative emotions toward the other principals or who prefer competitive engagement strategies may generate and appropriate greater value from distributive negotiations by using behavior contingent contracts. Similarly, principals who are experiencing positive emotions toward their counterpart or who prefer collaborative engagement strategies may also generate and appropriate greater value — as well as better protect their relationship-based interests — in integrative negotiations by using a behavior contingent contract. The reason that these situations are optimum is that when a principal’s emotions or preferred engagement strategy is consistent with the tenor of the negotiation, the principal is less constrained in his or her capacity to accurately specify appropriate behaviors for the agent and subsequently evaluate the agent on their use of these behaviors.

According to Barry Staw, Lance Sandelands, and Jane Dutton (1981), systems containing limited resources generate rigid behaviors and are less open to novel solutions. Negotiation researchers have echoed this assertion by demonstrating the tendency for principals to take ownership in preferred solutions rather than exploring further possibilities (Filley 1975; Fisher, Ury, and Patton 1991; Walton and McKersie 1965). Thus, as the Zone of Possible Agreement (ZOPA) decreases in size, a principal’s capacity to generate mutual benefit or appropriate value rapidly diminishes (Bazerman et al. 1992; Parks and Conlon 1995; Ross and Stillinger 1991).

Although entering an agency contract is likely to shrink the ZOPA further (Bazerman et al. 1992; Conlon and Parks 1990; Eisenhardt 1989; Parks and Conlon 1995), researchers have suggested that positive returns are also likely to result from the agency contract. In brief, negotiating through an agent when facing a small ZOPA may generate returns by: (1) helping in the process of cooperative problem solving (Parks and Conlon 1995); (2) adding to the structure of the negotiation (Gilson and Mnookin 1994); (3) establishing common ground between the principals through a novel information search (Rubin and Sander 1988); and (4) positioning the agent to influence a counterpart’s perception of the bargaining zone through persuasion (Pfeffer and Salancik 1974; Swenson, Nash, and Roos 1984).

In addition to diminishing the principal’s capacity to generate a settlement, a small ZOPA may also constrain the principal’s choice of agency contract. In short, an agent is expected to facilitate an agreement that maximizes his or her own compensation ( Valley et al. 1992). Thus, the premise behind an outcome contingent contract is to align the goals of the agent with the goals of the principal such that an agreement that maximizes the compensation for the agent also maximizes the payoff for the principal (Eisenhardt 1989). However, as argued previously, when facing a large ZOPA an outcome contingent contract may not benefit the agent to the same extent that it does the principal (Bazerman et al. 1992; Jud and Frew 1986). Specifically, once a minimally acceptable settlement has been achieved, the agent must trade off the value of a more optimal settlement for their client against the costs of negotiating further.

When facing a small ZOPA, however, the difference between a minimally acceptable deal (the principal’s reservation point) and an optimal deal (the counterpart’s reservation point) is small. Thus, the likelihood of an impasse is increased. Therefore, it stands to reason that, when facing a small ZOPA, an outcome contingent contract will motivate an agent first and foremost to avoid an impasse, as the agent’s remuneration is contingent on a settlement. In these circumstances, it is likely in the principal’s best interests not to constrain the agent’s actions through a behavior contingent contract. Moreover, a behavior contingent contract results in remuneration for the agent even if a settlement is not reached. Thus:

Although it is recognized that a principal facing a small ZOPA may still have the capacity to generate a solution without the assistance of an agent, Proposition Three is intended to describe circumstances in which the principal is able to garner additional benefit from negotiating through an agent that would not have been possible had the principal negotiated alone. Examples of these instances may include the selling of a home in a buyers’ market or the division of property following a divorce.

In their discussions of the agent appointment decision, both David Lax and James Sebenius (1986) and Jeffrey Rubin and Frank Sander (1988) identified circumstances in which the principal is likely to achieve decreased returns by negotiating through an agent. The focus of the returns in these circumstances was in relation to the principal’s relationship-based interests. Under ideal conditions, a principal would be able to negotiate independent of an agent, thereby protecting his or her relationship-based interests. Under realistic conditions, however, a principal may require an agent for other reasons (e.g., expertise). The two circumstances that follow address a principal’s need for independence from an agent in these less-than-ideal situations.

Alan Fiske (1991) identified four types of social relationships: (1) market pricing; (2) authority ranking; (3) equality matching; and (4) communal sharing. The first three of these relationship types involve both parties contributing to and benefiting from the transaction (Fiske 1991). Communal relationships, in contrast, are characterized by implicit rules of concern for the other party (Clark, Mills, and Powell 1986); a desire to help the other party without expectation of reciprocity (Clark, Mills, and Corcoran 1989); and a desire for positive moods and self-evaluations stemming from helping others (Williamson and Clark 1989).

Consistent with communal relationship norms, Kurtzberg and Medvec (1999) argued that the term “negotiation” tends not to be used among friends, as it implies a goal of achieving the best individual payoff rather than looking out for each other’s needs. Conflict is often perceived as a potential threat to a communal relationship and is therefore avoided. Consequently, negotiations within communal or close relationships are characterized by more cooperation, increased exchange of information, fewer demands, and more concessions (Fiske 1992; Kurtzberg and Medvec 1999; Schoeninger and Wood 1969; Valley, Neale, and Mannix 1995). Although each of these is typically considered a contributing factor to integrative settlements, communal transactions rarely achieve optimal settlement (Fry, Firestone, and Williams 1983; Kelley and Schenitzki 1972; Thompson and DeHapport 1998; Valley, Neale, and Mannix 1995). Nevertheless, the parties tend to remain satisfied with the outcome.

As discussed earlier, the behaviors typical of an agent are likely to generate greater returns with regard to the principal’s substantive interests. These same behaviors, however, are likely to generate costs with regard to the principal’s communal relationship-based interests. Specifically, agents are likely to: (1) make more extreme demands and fewer concessions (Conlon and Sullivan 1999; Klimoski 1972; Pruitt and Carnevale 1993); (2) bargain more competitively and unfairly (Benton 1975; Luce and Raiffa 1957); (3) intensify the divisiveness of the negotiation (Gilson and Mnookin 1994); and (4) distort the communication between principals to suit their own interests (Conlon and Sullivan 1999; Gilson and Mnookin 1994; Pruitt and Carnevale 1993). Thus, if the negotiation is to occur within a communal relationship, a behavior contingent agency contract allows the principal to monitor the behaviors directed toward his or her counterpart or the counterpart’s agent.

Related to relationship norms, principals may also consider repeated interaction negotiations that occur in exchange-type relationships (Lax and Sebenius 1986). Principals with relationship-based interests are likely to perceive the potential effects of their behaviors on the behaviors and outcome preferences of their counterparts, and acknowledge that the established pattern is likely to continue (Kelley 1979; Kelley and Thibaut 1978). As a result, negotiators with expectations of future interaction tend to be more willing to take lower individual payouts (Homans 1961; Johnson 1982) and engage in more collaborative and accommodating behaviors (Johnson 1982). According to the model of negotiation strategy choice (Savage, Blair, and Sorenson 1989), negotiators face a tension between concurrently maximizing substantive and relationship-based interests. Because of the agent behaviors described above, an outcome contingent agency contract transfers undue risk to the principal with respect to his or her relationship-based interests. Thus, Proposition Four is as follows:

The preceding discussion expounded on the theory that a principal’s decision between behavior and outcome contingent agency contracts often depends on the conditions that led the principal to decide to negotiate through an agent. Specifically, principals who possess little to no information expertise, who are experiencing positive emotions, or who prefer a collaborative engagement strategy are likely to generate and appropriate greater value from a distributive negotiation when they use an outcome contingent contract. Similarly, principals who possess little to no information expertise, who are experiencing negative emotions, or who prefer a competitive engagement strategy when facing an integrative negotiation are likely to generate and appropriate greater value — as well as better maintain their relationship-based interests — by using an outcome contingent contract. Principals who face a small ZOPA, whether in a distributive or an integrative negotiation, are likely to generate and appropriate greater value from an outcome contingent contract.

However, principals who are experiencing emotions or who prefer an engagement strategy that is consistent with the tenor of either a distributive or integrative negotiation (e.g., positive emotions or collaborative engagement strategies in integrative negotiations) are likely to generate and appropriate greater value and better maintain their relationship-based interests by using a behavior contingent contract. A principal who is engaged in a communal relationship or a repeated negotiation interaction is likely to better maintain his or her relationship-based interests by using a behavior contingent contract over an outcome contingent contract. Likewise, a principal with high information expertise is also more likely to benefit from a behavior contingent contract as they are better able to determine and measure appropriate negotiation behaviors.

In summary, the six circumstances developed in the preceding discussion are intended to address the extent to which the principal’s need for an agent constrains the agency contract options available to the principal.

By conceptualizing a principal’s dependence on an agent to generate or improve a negotiated settlement as an instrumental factor in the principal’s choice between agency contract forms, it becomes apparent that researchers of principal–agent negotiations need to revisit the context of negotiations used in previous principal–agent research. According to the preceding discussion, the effectiveness of behavior and outcome contingent contracts on a principal’s substantive and relationship-based interests differ based on conditions of high versus low levels of principal expertise, emotional strain, favored engagement strategy, size of the ZOPA, communal relationship norms, and the frequency of interactions between two specific principals. Specifically, the effectiveness of a behavior or outcome contingent contract will be moderated by the six conditions identified previously.

In practical terms, the preceding discussion suggests that principals may tailor their agency contract to the specifics of the negotiation context and in accordance with the priority they place on substantive or relationship-based interests. Specifically, the preceding discussion proposes that principals who face constraints above and beyond the information dependence described by Eisenhardt (1989) may be otherwise limited in their choice between behavior and outcome contingent agency contracts.

To date, a principal’s choice of agency contract has been assumed to be somewhat independent of the circumstances that led the principal to enter an agency relationship. This article tests this assumption by emphasizing the limitations of a traditional economics approach in explaining the benefits and costs of an agency relationship. In doing so, this article supplements Eisenhardt’s (1989) summary of agency theory by identifying how the cognitive (expertise), behavioral (emotions and engagement strategy/reputation), and relationship-based (communal relationship norms and repeated interactions) aspects of the principal are potentially instrumental in determining the most viable form of agency contract. Further complementing Eisenhardt’s (1989) outcome uncertainty characteristic, the current discussion also identifies how the environmental circumstance of a small ZOPA may also impact the viability of outcome and behavior contingent agency contracts.

As previously discussed, agency theory provided a foundation from which principals may estimate the most viable agency contract. However, the application of agency theory to representative negotiation contexts required an expansion of the theory to account for the dependence of agency contracts on the variables that led the principal to negotiate through an agent in the first place. Four primary recommendations for future study by representative negotiation researchers stem from this expansion.

A theoretical implication of the preceding discussion is that an optimal agency contract may exist for each circumstance of principal dependence or independence. Efforts to address multiple circumstances simultaneously, however, are impeded by any differences in the principal’s choice of agency contract associated with the principal’s level of dependence on the multiple constraints. For instance, an emotionally strained principal in a communal relationship must choose between an outcome and behavior contingent contract. The preceding discussion, however, does not identify a means by which to integrate multiple constraints to establish one optimal agency contract.

Little is known about how the six factors interact to influence substantive and relationship-based interests. Therefore, future developments in representative negotiation research should focus on the interactions among multiple factors of dependence and independence and the impact of different agency contracts with respect to both substantive and relationship-based interests. These developments should include situations in which consideration for substantive and relationship-based interests in combination generates tensions that are difficult to resolve (Elangovan 1995; Neale and Bazerman 1991; Sheppard 1984). For instance, attempts to maximize the appropriation of value may evoke negotiation behaviors that jeopardize the maintenance or improvement of the interprincipal relationship (Pruitt and Rubin 1986; Savage, Blair, and Sorenson 1989).

With regard to the impact of the interaction between the principals in a negotiation, researchers should also consider situations in which the two principals involved may place different emphasis on either the substantive or the relationship-based criteria in the same negotiation context. That is, one principal may prefer to maximize substantive gain, whereas the other would prefer to maximize relationship-based interests. As these opposing interests become clear during the process of a negotiation, how might the knowledge of their counterpart’s behavior impact or change the principal’s original goals and priorities established in the contract?

The preceding discussion describes a means by which to identify the most viable agency contract, but does not propose a means to implement the agency contract once it has been identified. Further developments of this discussion and others like it should focus on the process by which a principal can identify an appropriate agent and initiate the negotiation in accordance with the proposed agency contract. Linked to the implementation of the contract is the potential evolution of the agent’s role as the negotiation progresses. Although Roger Fisher and Wayne Davis (1999) identify a seven-step authority adjustment process, future research may focus attention on how the agent’s role may change during the negotiation.

Although the preceding discussion outlines the association between agency contracts and relationship-based interests, further development is needed with respect to this and other nonsubstantive criteria. For instance, researchers should focus on the principal’s subjective perceptions of settlement quality. Specifically, justice researchers have called attention to the relationship between an individual’s control over a process and the individual’s perceptions of fairness (Lind, Kanfer, and Earley 1990). A principal is likely to perceive the process of negotiating without an agency contract as fair because the principal maintains control over the process, the information exchanged, and the interpersonal treatment of the counterpart (Thibaut and Walker 1975). As an agent’s responsibility increases, however, the principal’s participation and control over the negotiation process is reduced, thereby reducing the number of fairness cues. As a result, under an outcome contingent agency contract, principals have only the settlement from which to formulate fairness perceptions (Greenberg 1987; Lewicki and Sheppard 1985). Thus, positive fairness perceptions are likely to be directly related to a principal’s level of involvement in the negotiation. Recent developments in Alternative Dispute Resolution have supported this proposition, noting that a principal’s participation in the negotiation positively affects his or her perceptions of fairness and satisfaction with the settlement ( Welch 2001).

A further limitation of principal–agent research in general is that it does not adequately address the principal’s, as well as the counterpart’s, commitment to the negotiated settlement. Similar to dispute resolution contexts, commitment is associated with the ease of implementation (Ury, Brett, and Goldberg 1988) and the durability of the solution (Sheppard, Blumenfeld-Jones, and Roth 1989). The importance of both commitment levels cannot be understated, as the implementation of a settlement requires both parties (Fisher, Ury, and Patton 1991; Greenhalgh 2001; Holmes 1992; Walton and McKersie 1965). At the core of commitment are a negotiator’s perceptions of fairness and satisfaction (Brett and Rognes 1986; Elangovan 1995; Folger and Konovsky 1989; Vroom and Yetton 1973). Thus, negotiator commitment is likely to be interrelated with the interprincipal relationship, as a person’s choice of fairness rules often depends on the relationship between individuals (Austin 1980; Leventhal 1976).

Given the dependency of agency contracts on the negotiation circumstances described above, principals may face a situation in which an outcome contingent contract is the most viable. In these instances, principals may benefit from an additional means by which to curb an agent’s self-interested behaviors. Future discussions may address the allocation of authority as one such means.

Harold Reuschlein and William Gregory (1979) defined authority as the expression of a principal’s consent for an agent to take action. Authority may be further separated into two related, yet distinct, components: commitment and communication authority (Fisher and Davis 1999). Commitment refers to the authority given to an agent to make an assurance on the principal’s behalf to issues that may eventually comprise the final settlement. Communication refers to the authority given to an agent to release information regarding the principal or the principal’s interests to a counterpart.

Information is the primary tool by which principals can limit communication and commitment authority. In contrast to agents, principals are not bound by a full disclosure clause (Gilson and Mnookin 1994). Thus, a principal may have the capacity to prevent the agent from anchoring on a minimally acceptable settlement (Lax and Sebenius 1991; Valley et al. 1992) by withholding information such as reservation points. The concealment of this information is likely to increase the level of uncertainty perceived by an agent regarding potential settlements, thereby increasing the agent’s motivation to generate multiple potential options that are of value to the principal (Downs and Rocke 1994).

The principal’s concealment of information, however, must not be more extensive than is necessary. Complete uncertainty on the part of the agent caused by a lack of information may restrict the range of acceptable settlements on the pareto frontier (Lax and Sebenius 1991), and push the negotiation toward becoming more distributive and divided rather than integrative (Axelrod 1967). Furthermore, if an agent is not provided with sufficient authority, the negotiation counterpart is unlikely to take the agent seriously (Fisher and Davis 1999). Consequently, principals may consider providing agents with information concerning potential settlements without revealing vital information such as reservation points.

Regardless of the agency contract, a principal should retain two authority rights. At the outset of a negotiation, an agent should not be given the authority to bind a principal to any substantive issue. By withholding early binding authority for substantive issues, principals are likely to focus agents on developing the negotiation process, thereby increasing the likelihood of a quality settlement (Fisher and Davis 1999). Although binding authority for substantive issues may be granted as the negotiation progresses, a principal should maintain final binding authority throughout the negotiation (Mo 1995). If a principal relinquishes veto power, the settlement may end in a compromise or favor the principal’s counterpart (Karambayya and Brett 1989).

A principal’s choice between behavior and outcome contingent contracts is an important one as it has widespread implications for the principal’s capacity to generate and claim value from the negotiation as well as maintain his or her relationship-based interests. It follows from the preceding discussion that principals may be constrained in their choice between contract forms by the circumstances that led them to employ agents. Specifically, principals’ own behavioral intentions and personal characteristics, whether negotiations are integrative or distributive, and the priority that principals place on substantive and relationship-based interests may limit how principals tailor their agency contracts.

Accordingly, this discussion has attempted to identify the raw material for sound advice to principals about the conditions under which either a behavioral or outcome contingent contract will generate the best settlement possible. In short, it would be remiss for principals or researchers of representative negotiations not to consider how a principal’s dependency on an agent constrains the principal’s choice between contract forms.