Abstract

http://ssrn.com/abstract=1868986
 
 

References (32)



 
 

Citations



 


 



Can Agent Cheap Talk Mitigate Agency Problems in the Presence of a Noisy Performance Measure? An Experimental Test in a Single- and Multi-Period Setting


Jeremy Douthit


University of Arizona - Department of Accounting

Linwood Kearney


Wichita State University - W. Frank Barton School of Business

Douglas E. Stevens


Florida State University

April 18, 2012

Journal of Management Accounting Research, Forthcoming

Abstract:     
Given traditional agency theory assumptions and unobservable effort in a single-period setting, a moral hazard arises in which the agent is expected to shirk and provide the miminal possible effort after contracting with the principal. Traditional solutions to this agency problem include paying the agent a financial incentive tied to some noisy measure of performance or allowing the agent to develop a reputation over multiple periods. As the noisiness of the performance measure increases, however, these traditional solutions become increasingly costly and ineffective. In many single- and multi-period agency settings in the firm, however, the agent can communicate a promised level of effort to the principal prior to contracting. We document that this pre-contract communication, which is non-enforceable and therefore considered “cheap talk” by traditional economic theory, can be highly effective in mitigating the moral hazard problem in agency theory. In a repeating single-period experimental setting where production is observable but is a very noisy indicator of effort, communication of a promised level of effort results in higher pay for the agent, higher effort, and higher expected profit for the principal than the control group. When the principal and agent interact over multiple periods, reputation building is ineffective but cheap talk continues to yield superior outcomes. These results are consistent with recent economic theory incorporating social norms such as the norm of promise-keeping.

Keywords: agency problems, agent cheap talk, noisy performance measures, social norms, promise-keeping

JEL Classification: D23, D63, D82, J31, M52

Accepted Paper Series


Not Available For Download

Date posted: June 22, 2011 ; Last revised: June 21, 2012

Suggested Citation

Douthit, Jeremy and Kearney, Linwood and Stevens, Douglas E., Can Agent Cheap Talk Mitigate Agency Problems in the Presence of a Noisy Performance Measure? An Experimental Test in a Single- and Multi-Period Setting (April 18, 2012). Journal of Management Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1868986 or http://dx.doi.org/10.2139/ssrn.1868986

Contact Information

Jeremy Douthit
University of Arizona - Department of Accounting ( email )
Tucson, AZ 85721
United States
Linwood Kearney
Wichita State University - W. Frank Barton School of Business ( email )
1845 N. Fairmount
Wichita, KS 67260
United States
Douglas E. Stevens (Contact Author)
Florida State University ( email )
Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-644-7855 (Phone)
850-644-8234 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 473

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.296 seconds