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

Agency theory describes the viability of outcome and behavior contingent contracts in principal–agent transactions. This article proposes that a principal's choice between the two contract forms in a representative negotiation is constrained by the conditions that led a principal to employ an agent. Six of these conditions — expertise, emotional strain, the principal's preferred engagement strategy, zone of possible agreement, communal relationship norms, and repeated interactions between principals — are reviewed and summarized in testable propositions. Specifically, the six conditions are proposed to underscore the viability of behavior versus outcome contingent contracts in serving the principal's substantive and relationship-based interests.