An incentive to shirk, privately held information, and managers' project evaluation decisions

Abstract

A significant body of research indicates that managers often continue projects which logically should be discontinued to prevent subsequent losses to their firms. Affective explanations are usually provided for these apparently illogical decisions; for example, feelings of personal responsibility may bias the managers' evaluation of a project. In contrast, this study employs two agency theory concepts to investigate whether a rational explanation may exist for these decisions. A decision-making experiment was performed to examine the prediction that project managers who both experienced an incentive to shirk and possessed privately held information would exhibit a greater tendency to continue a project which was expected to become unprofitable than would those who experienced only one or neither of these conditions. Consistent with agency theory, the results indicate these two factors interact, providing support for the predicted relationships. Implications for the design of management incentive and control systems and suggestions for further research are presented.