Inefficient Investment, Information Asymmetry, and Competition for Managers

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We investigate the possible inefficiency of investment when the manager has better information than the principal. We assume that projects can be grouped into two categories based on their information characteristics of soft and hard information. We consider a case in which the manager faces competition for appointment at the end of term. We consider several cases in which the competitor's ability is known, or proxied by the performance of other managers, or is uncertain. We find that hard information projects are preferred to soft information projects and that the efficiency in project selection critically depends on the competitor's ability. Interestingly, information asymmetry may be socially beneficial, because it can provide the manager with incentives to select high-quality hard-information projects. Welfare improvement can be made by a budget change that is in the opposite direction to the optimum. Several empirical implications of the theory are discussed.
Publisher
WILEY-BLACKWELL
Issue Date
2012
Language
English
Article Type
Article
Keywords

INTERNAL CAPITAL-MARKETS; CORPORATE DIVERSIFICATION; DYNAMIC-ANALYSIS; AGENCY COSTS; FIRMS; ACQUISITIONS; RESOURCES; BEHAVIOR

Citation

JOURNAL OF PUBLIC ECONOMIC THEORY, v.14, no.6, pp.971 - 995

ISSN
1097-3923
DOI
10.1111/jpet.12006
URI
http://hdl.handle.net/10203/102837
Appears in Collection
MT-Journal Papers(저널논문)
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