Theories in Business/Social Science

Research
 Theories in Business Research
• What is a theory?
• Theory is an explanation to a natural or social behavior, event, or phenomena
• Formally, a scientific theory is a system of constructs (concepts) and
propositions (relationships between those constructs) that collectively
presents a logical, systematic, and coherent explanation of a phenomenon of
interest within some assumptions and boundary conditions (Bacharach 1989).
• Theories should explain why things happen, rather than just describe or
predict.
• Explanations can be idiographic or nomothetic.
Bacharach, S. B. (1989). Organizational Theories: Some Criteria for Evaluation, Academy of Management Review (14:4), 496-515.
 Benefits of using Theories in Research
• Theories provide the underlying logic of the occurrence of natural or social
phenomenon by explaining what are the key drivers and key outcomes of the
target phenomenon and why, and what underlying processes are responsible
driving that phenomenon.
• Theories aid in sense-making by helping us synthesize prior empirical findings
within a theoretical framework and reconcile contradictory findings by
discovering contingent factors influencing the relationship between two
constructs in different studies.
• Theories provide guidance for future research by helping identify constructs and
relationships that are worthy of further research.
• Theories can contribute to cumulative knowledge building by bridging gaps
between other theories and by causing existing theories to be reevaluated in a
new light.
 Building Blocks of a Theory
David Whetten (1989) suggested four building blocks of a complete
theory: constructs, propositions, logic, and boundary conditions.
• Constructs capture the “what” of theories (What concepts are important for
explaining a phenomenon),
• Propositions capture the “how” (How are these concepts related to each other),
• Logic represents the “why” (Why are these concepts related), and
• Boundary conditions/assumptions examines the “who, when, and where” ( Under
what circumstances will these concepts and relationships work).
Note: All theories are constrained by assumptions about values, time, and
space, and boundary conditions that govern where the theory can be applied
and where it cannot be applied.
Whetten, D. A. (1989). What constitutes a theoretical contribution?. Academy of management review, 14(4), 490-495.
Distinction between theoretical (propositions) and empirical (hypothesis) concepts
 Attributes of a Good Theory

• Logical consistency: Are the theoretical constructs, propositions, boundary

conditions, and assumptions logically consistent with each other?

• Explanatory Power: How much does a given theory explain (or predict) reality?

• Falsifiability: A theory is falsifiable if it is contradicted by an observation that is

logically possible

• Parsimony: Examines how much of a phenomenon is explained with how few

variables
 Approaches to Theorizing
How do researchers build theories?. Steinfeld and Fulk (1990) recommended four
approaches.
• To build theories inductively based on observed patterns of events or behaviors,
“grounded theory building”, as theory is grounded in empirical observations
• To conduct a bottom-up conceptual analysis to identify constructs relevant to
the phenomenon of interest using a predefined framework
• To extend or modify existing theories to explain a new context
• To apply existing theories in entirely new contexts by drawing upon the
structural similarities between the two contexts. Markus (1987) used analogic similarities
between a nuclear explosion and uncontrolled growth of network-based businesses to propose a critical mass
theory of network growth.

1. Steinfield, C.W. and Fulk, J. (1990). “The Theory Imperative," in Organizations and Communications Technology, J. Fulk and C. W. Steinfield (eds.), Newbury Park, CA: Sage Publications.
2. Markus, M. L. (1987). “Toward a ‘Critical Mass’ Theory of Interactive Media: Universal Access, Interdependence, and Diffusion,” Communication Research (14:5), 491-511.
 Examples of Social Science Theories
• Following theories explain different types of social behaviors, using a set of constructs,
propositions, boundary conditions, assumptions, and underlying logic.

• Agency theory
• Information Systems Use Theories (TAM, UTAUT)
• Theory of Effective IS Use
• Theory of Planned Behavior
• Innovation Diffusion Theory
• General Deterrence Theory
• Actor Network Theory
• D&M IS Success Model
• Fit Viability Theory
Exercise: Identify constructs, propositions, boundary conditions, assumptions, and underlying logic from the summary of agency theory.

Agency Theory (also called principal-agent theory), a classic theory in the organizational economics literature, was originally proposed by Ross
(1973) to explain two-party relationships (such as those between an employer and its employees, between organizational executives and
shareholders, and between buyers and sellers) whose goals are not congruent with each other. The goal of agency theory is to specify optimal
contracts and the conditions under which such contracts may help minimize the effect of goal incongruence. The core assumptions of this theory
are that human beings are self-interested individuals, boundedly rational, and risk-averse, and the theory can be applied at the individual or
organizational level.
The two parties in this theory are the principal and the agent; the principal employs the agent to perform certain tasks on its behalf. While the
principal’s goal is quick and effective completion of the assigned task, the agent’s goal may be working at its own pace, avoiding risks, and
seeking self-interest (such as personal pay) over corporate interests. Hence, the goal incongruence. Compounding the nature of the problem may
be information asymmetry problems caused by the principal’s inability to adequately observe the agent’s behavior or accurately evaluate the
agent’s skill sets. Such asymmetry may lead to agency problems where the agent may not put forth the effort needed to get the task done (the
moral hazard problem) or may misrepresent its expertise or skills to get the job but not perform as expected (the adverse selection problem).
Typical contracts that are behavior-based, such as a monthly salary, cannot overcome these problems. Hence, agency theory recommends using
outcome-based contracts, such as a commissions or a fee payable upon task completion, or mixed contracts that combine behavior-based and
outcome-based incentives. An employee stock option plans are is an example of an outcome-based contract while employee pay is a behavior-
based contract. Agency theory also recommends tools that principals may employ to improve the efficacy of behavior-based contracts, such as
investing in monitoring mechanisms (such as hiring supervisors) to counter the information asymmetry caused by moral hazard, designing
renewable contracts contingent on agent’s performance (performance assessment makes the contract partially outcome-based), or by improving
the structure of the assigned task to make it more programmable and therefore more observable.

Ross, S. A. (1973). “The Economic Theory of Agency: The Principal’s Problem,” American Economic Review (63:2), 134-139 .