Agency in Project Screening and Termination Decisions: Why is Good Money Thrown after Bad?
AbstractWe construct an agency model in which the planner (agent) makes project starting and termination decisions on behalf of the state (principal) to reflect the practice of socialist economies. The model shows that asymmetric information between the state and the planner regarding the quality of projects started leads to the persistence of unprofitable projects in most cases. Since in the model it is assumed that the state's objective is to maximize economic profit and the state has full power to dictate and enforce the optimal contract, the finding of the model has the implication that hardening budget constraints in socialist economies is difficult even under an "ideal" setting when these economies are free of social considerations and political frictions.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 347..
Length: 41 pages
Date of creation: 01 Jan 1997
Date of revision:
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Soft budget; agency; project screening and termination;
Other versions of this item:
- Chong-en Bai & Yijiang Wang, 1997. "Agency in Project Screening and Termination Decisions: Why Is Good Money Thrown After Bad?," William Davidson Institute Working Papers Series 43, William Davidson Institute at the University of Michigan.
- P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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