Killing the Bearer of Ill Tidings: A Theory of Consensus-Provision Moral Hazard
IFA Working Paper 274-1998
42 Pages Posted: 26 Feb 1999
Date Written: December 1998
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 agent generates "consensus-provision" moral hazard. It causes agents 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 behavior, business cycles and reluctance to be the "bearer of ill tidings".
JEL Classification: G3, L2, D2
Suggested Citation: Suggested Citation