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. 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 William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 43.
Date of creation: 01 May 1997
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ex post inefficiency; agency; project screening (and termination); information;
Other versions of this item:
- Chong-en Bai & Yijang Wang, 1997. "Agency in Project Screening and Termination Decisions: Why is Good Money Thrown after Bad?," Boston College Working Papers in Economics 347., Boston College Department of Economics.
- P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-04-03 (All new papers)
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