Information acquisition and optimal project management

Shin, Dongsoo

doi:10.1016/j.ijindorg.2007.09.004

Cited by 10 publications

(9 citation statements)

References 30 publications

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“…Some researchers argue that the sunk-cost effect has often been confounded and confused with other effects, such as the project completion effect (Garland and Newport 1991;Conlon and Garland 1993;Garland and Conlon 1998;Boehne and Paese 2000;Jensen et al 2011). In addition to the reasoning with behavioral mechanisms, some researchers argue that such biases are due to informational asymmetries or inefficiencies (Shin 2008;Simester and Zhang 2010).…”

Section: Definition and Delineationmentioning

confidence: 99%

On the sunk-cost effect in economic decision-making: a meta-analytic review

Roth

Robbert

Straus

2014

Bus Res

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Although the effect of monetary sunk costs on decision-making is widely discussed, research is still fragmented, and results are sometimes controversial. One reason for this incomplete picture is the missing differentiation between the effect of sunk costs on utilization and progress decisions and its respective moderators. This article presents the results of a meta-analytic review of 98 effect sizes of the sunk-cost effect, with special emphasis on the decision-specific influence of moderators. The results show clear evidence that the sunk-cost effect emerges, though its effect size and the influence of the moderators are contingent on the respective decision type. In particular, we find support for the idea that the sunkcost effect is attenuated by time in utilization decisions. The results also reveal that older adults are less likely to fall prey to the sunk-cost effect than younger adults.

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Section: Definition and Delineationmentioning

confidence: 99%

On the sunk-cost effect in economic decision-making: a meta-analytic review

Roth

Robbert

Straus

2014

Bus Res

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“…Some consider moral hazard before the selection process, when effort must be invested to improve the projects (Sappington 1982). Others study moral hazard at the selection stage, when information about projects must be acquired at a cost (Lambert 1986;Shin 2008). Finally, others consider moral hazard after the selection is made, when the selected project is undertaken.…”

Section: Related Literaturementioning

confidence: 99%

Optimal Project Selection Mechanisms

Bar

Gordon

2014

American Economic Journal: Microeconomics

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We study mechanisms for selecting up to m out of n projects. Project managers' private information on quality is elicited through transfers. Under limited liability, the optimal mechanism selects projects that maximize some function of the project's observable and reported characteristics. When all reported qualities exceed their own project-specific thresholds, the selected set only depends on observable characteristics, not reported qualities. Each threshold is related to (i) the outside option level at which the cost and benefit of eliciting information on the project cancel out and (ii) the optimal value of selecting one among infinitely many ex ante identical projects. (JEL D21, D82, O32) M any individuals, firms, and government agencies face situations in which they need to choose between a number of projects. Often, when making this choice the decision maker (from now on "the firm") is not fully informed and needs to rely on better informed agents whose interests are not aligned with the firm's interests. Our paper studies the firm's project selection problem under asymmetric information. For example, a firm, or a government agency, deciding which R&D projects to pursue, from projects proposed by managers working for the firm; or a corporate board deciding which capital investment project to finance.Projects can be risky, the likelihood of success (or the net expected return) might not be known to the decision maker, who is not sufficiently familiar with the technical details. Project managers hold private information about the quality of their projects, and typically prefer that their own project be selected. Hence, their interests are not perfectly aligned with those of the decision maker, and an agency problem arises. As Paul Sharpe (vice president at SmithKline Beecham) and Tom Keelin described:Major resource-allocation decisions are never easy. For a pharmaceuticals company like SB [SmithKline Beecham], the problem is this: How do you make good decisions in a high-risk, technically complex business when the information you need to make those decisions comes largely ). We are indebted to Dirk Bergemann for his guidance and invaluable advice. We are grateful to

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“…Other related papers include Shin (2008), who investigates a manager's incentives to acquire information about the cost of implementing a project. If the manager is the residual claimant for any unspent budget then (s)he has an incentive to overstate this cost (see also Guo 2009).…”

Section: Other Related Literaturementioning

confidence: 99%

“…In this case, a positive outside opportunity cannot help the firm eliminate the investment inefficiency problem. 5 For recent examples of papers that make the same assumption see: Bester and Krähmer (2008); Bergmann and Friedl (2008);and Shin (2008). serving the supervisory role. Because the investors and Board are rarely co-located with the CEO, the CEO's efforts may be particularly difficult to observe.…”

Section: Observability Of Effort and Demandmentioning

confidence: 99%

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Why Are Bad Products So Hard to Kill?

Simester

Zhang

2010

Management Science

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It is puzzling that firms often continue to invest in product development projects when they should know that demand will be low. We argue that bad products are hard to kill because firms face an inherent conflict when designing managers' incentives. Rewarding success encourages managers to forge ahead even when demand is low. To avoid investing in low-demand products, the firm must also reward decisions to kill products. However, rewarding managers for killing products effectively undermines the rewards for success. The inability to resolve this tension forces the firm to choose between paying an even larger bonus for success and accepting continued investment in low-demand products. We explore the boundaries of this argument by analyzing how the timing of demand information affects product investment decisions.product development, managerial incentives, moral hazard, adverse selection, information acquisition

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Information acquisition and optimal project management

Cited by 10 publications

References 30 publications

On the sunk-cost effect in economic decision-making: a meta-analytic review

On the sunk-cost effect in economic decision-making: a meta-analytic review

Optimal Project Selection Mechanisms

Why Are Bad Products So Hard to Kill?

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