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Information acquisition and optimal project management

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  • Shin, Dongsoo

Abstract

This paper provides a rationale for why an organization often generates a bias in favor of a new project even after learning that its profitability will be certainly below more conventional ones. We analyze a principal-agent model with two alternative projects, one of which is to be chosen by the principal. In our model, the profitability of a project is determined by the cost of implementation. All parties are familiar with one of the projects (the known project), and thus the implementation cost of this project is common knowledge. Information on the other project (the new project), however, must be acquired by the agent. We find that the new project may be chosen in the optimal contract even when it turns out to be more costly to implement than the known project, if acquiring information is costly enough and the realized implementation cost of the new project is below a particular level. We also discuss distortion in the new project's output schedule when it is selected.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 4 (July)
Pages: 1032-1043

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Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:1032-1043

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Sobel, Joel, 1993. "Information Control in the Principal-Agent Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 259-69, May.
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  18. Fahad Khalil & Doyoung Kim & Dongsoo Shin, 2006. "Optimal Task Design: to integrate or separate planning and implementation?," Working Papers UWEC-2003-01-P, University of Washington, Department of Economics.
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  20. Campbell, Tim S & Chan, Yuk-Shee & Marino, Anthony M, 1993. "Incentives for Information Production and Optimal Job Assignment with Human Capital Considerations," Economica, London School of Economics and Political Science, vol. 60(237), pages 13-26, February.
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Cited by:
  1. Talia Bar & Sidartha Gordon, 2013. "Optimal Project Selection Mechanisms," Sciences Po publications 2013-08, Sciences Po.
  2. Blumrosen, Liad & Feldman, Michal, 2013. "Mechanism design with a restricted action space," Games and Economic Behavior, Elsevier, vol. 82(C), pages 424-443.

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