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Harmful monitoring

Author

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  • Haan, Marco A.
  • Los, Bart
  • Riyanto, Yohanes E.

    (Groningen University)

Abstract

We show that there may be circumstances in which a principal prefers not to observe the project choice of an agent that acts on her behalf. The ability of the agent is private information. Projects differ with respect to the amount of risk. If the principal can observe the project choice of the agent, the latter will use that choice as a signal. In the separating equilibrium, an agent with high ability then chooses a project that is too risky. If more difficult projects require more effort, there are two opposite effects. The shirking effect implies that the agent chooses a project that is too safe. The signaling effect implies that he chooses a project that is too risky. The net effect is ambiguous. We also discuss the implications of our model for promotion policies.

Suggested Citation

  • Haan, Marco A. & Los, Bart & Riyanto, Yohanes E., 2007. "Harmful monitoring," Research Report 07003, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    • Handle: RePEc:gro:rugsom:07003
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    File URL: http://irs.ub.rug.nl/ppn/301931496
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    References listed on IDEAS

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    1. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
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    5. Marco Haan & Bart Los & Yohanes Riyanto, 2011. "Signaling strength? An analysis of decision making in The Weakest Link," Theory and Decision, Springer, vol. 71(4), pages 519-537, October.
    6. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
    7. Kanodia, C & Bushman, R & Dickhaut, J, 1989. "Escalation Errors And The Sunk Cost Effect - An Explanation Based On Reputation And Information Asymmetries," Journal of Accounting Research, Wiley Blackwell, vol. 27(1), pages 59-77.
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    Cited by:

    1. Marco Haan & Bart Los & Yohanes Riyanto, 2011. "Signaling strength? An analysis of decision making in The Weakest Link," Theory and Decision, Springer, vol. 71(4), pages 519-537, October.
    2. Marco A. Haan & Bart Los & Sander Onderstal & Yohanes E. Riyanto, 2010. "Punching above One's Weight: The Case against Election Campaigns," Tinbergen Institute Discussion Papers 10-056/1, Tinbergen Institute.

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