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Wasteful procedures?

Author

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  • Arve, Malin
  • Honryo, Takakazu

Abstract

We study investment decisions in organizations with private information in a principal-agent hierarchy. We show how investment decisions can be improved when the principal engages in two-sided money burning through the wasteful involvement in meetings and other procedures even if this is costly for the principal. In fact when this is more costly for the agent, the principal is willing to impose wasteful procedures as it constitutes a credible signal of the value of the investment. We show that this phenomenon of wasteful procedures will be used more in the optimal mechanism when costs of doing so are higher for the agent than for the principal.

Suggested Citation

  • Arve, Malin & Honryo, Takakazu, 2022. "Wasteful procedures?," Journal of Economics and Business, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:jebusi:v:122:y:2022:i:c:s0148619522000248
    DOI: 10.1016/j.jeconbus.2022.106068
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    References listed on IDEAS

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    More about this item

    Keywords

    Decision analysis; Investment; Asymmetric information; Principal-agent analysis;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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