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Killing the Bearer of Ill-Tidings: A Theory of Consensus-Provision Moral Hazard

Subject

Finance

Publishing details

IFA Working Paper

Publication Year

1998

Abstract

This paper examines the distortionary phenomena which occur when agents within the firm react to the organizational reality that the evaluation of the ideas that they analyze is often inseparable from the evaluation of their own ability. The commingling of the assessment of the business issue with that of the individual manager generates "consensus-provision" moral hazard. It causes managers to report assessments of business situations that they believe will coincide with the assessments of the people they report to. This desire to provide consensus leads to various distortions and helps illuminate some puzzling corporate practices related to project hurdle rates, the choice of payback as a project selection criterion, "groupthink", herding behaviour, business cycles and reluctance to be the "bearer of ill tidings".

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 274

Series

IFA Working Paper

Available on ECCH

No


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