Abstract This paper reconsiders how intrinsic motives that support trustworthiness should be modelled within economic theory, contributing to a methodologically pluralist business ethics. We re-examine the principal–agent problem, exposing a hidden assumption in the classic Jensen and Meckling (1976) solution. By introducing a lying cost—reflecting the agent’s concern for honesty—we reveal their model as a limiting case and distinguish between opportunistic agents and what we call ‘caring agents’, who have a disposition to tell the truth. When lying costs are sufficiently high, a first-best, fixed-wage contract becomes optimal, offering an alternative to the standard incentive-based approach. We also present a dynamic model in which incentive contracts may erode honesty over time, by signalling distrust and lowering agents’ lying costs—a downward spiral that crowds out trustworthiness. Drawing on recent developments in the philosophy of trust, we show how moral commitments can be formally integrated into economic models. Our results shed light on debates about the proper function of fiduciary relationships as recognized in law, and contribute to the explanation of why salaried contracts remain prevalent in professional roles, where strong financial incentives are also often resisted. Moral character, we argue, is not only normatively significant but also economically efficient.
Menzies et al. (Thu,) studied this question.