EconPapers    
Economics at your fingertips  
 

Information acquisition and optimal project management

Dongsoo Shin ()

International Journal of Industrial Organization, 2008, vol. 26, issue 4, 1032-1043

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.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167-7187(07)00120-8
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:26:y:2008:i:4:p:1032-1043

Access Statistics for this article

International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal

More articles in International Journal of Industrial Organization from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

 
Page updated 2021-06-09
Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:1032-1043