Honesty may be more efficient than incentives in organisations

This research grew out of Menzies' public lecture at Oxford, which focused on the lessons of the Global Financial Crisis, particularly the way economics can sometimes be used inappropriately to make moral decisions. He became interested in what standard economic analysis assumes about truth-telling, and whether those assumptions reflect how people always behave in organisations. 

The principal-agent model, which has helped justify large bonus contracts since the 1980s, effectively assumes that agents will not tell the truth unless they are incentivised to do so. Menzies teamed up with Professor Isa Hafalir at UTS to model this formally, and the ethical implications were explored by Tom Simpson, a professor of Moral Philosophy at Oxford.

“In many business situations, people are neither perfectly self-interested nor perfectly trustworthy. Our model captures that more realistic middle ground,” said Professor Menzies. 

“A key implication is that offering an incentive contract can itself send a signal of distrust. That can discourage honesty, reduce trustworthiness and create a downward spiral where even more incentives are needed.” 

Menzies reflects that could be why salaries remain common in professional roles such as medicine, law and other advisory fields. 

“Doctors, lawyers and other professionals are not just service providers responding to price signals. Their work depends on duties of loyalty, care and truthfulness,” he said.

“The persistence of salaried professional roles is not an accident. It reflects the very economic value and economic efficiency of trust, judgement and moral responsibility.”