Overstatement and Rational Market Expectation

Illoong Kwon () and Eunjung Yeo

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: When an agent overstates his/her true performance, a rational market can simply discount the reported performance, and correctly guess the true performance. This paper shows, however, that such rational market discounting leads to less productive effort by the agent and less performance-pay by the principal. Therefore, a rational market and a profit-maximizing principal can exacerbate the lack of productive effort by the agent.

Date: 2008
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Journal Article: Overstatement and rational market expectation (2009)
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