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

IFA Working Paper 274-1998

42 Pages Posted: 26 Feb 1999

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Date Written: December 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 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

Boot, Arnoud W. A. and Thakor, Anjan V. and Milbourn, Todd T., Killing the Bearer of Ill Tidings: A Theory of Consensus-Provision Moral Hazard (December 1998). IFA Working Paper 274-1998, Available at SSRN: https://ssrn.com/abstract=148555 or http://dx.doi.org/10.2139/ssrn.148555

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4162 (Phone)
+31 20 525 5318 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

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Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

Todd T. Milbourn (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

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