Skills, Incentives, and Control: An integration of agency and transaction cost approaches

Abstract

In recent years, agency and transaction cost approaches to incentives and control highlighted the issue of performance measurement. Although the general propositions of these economic theories have been supported in research, there are theoretical gaps with regard to the effects of uncertainty on control Also, implications of employee skills for control have been ignored in these approaches. This article integrates the two economic approaches and develops a framework incorporating skill level as a determinant of control. Hypotheses derived from this framework were tested in two merchant shipping companies employing crews of different nationalities. The results suggest that performance ambiguity and employee skill level are significant predictors of controls. The results also indicate that the choice between behavior-based and output-based controls may be driven more by job characteristics than nationality. Using these results, implications for practice and future research are discussed.