ABC’s of Principal-Agent Interactions: Accurate Predictions, Biased Processes, and Contrasts between Working and Delegating

Organizational Behavior and Human Decision Processes, Forthcoming

12 Pages Posted: 10 Jul 2010

See all articles by Katherine Alicia Burson

Katherine Alicia Burson

University of Michigan, Stephen M. Ross School of Business

Yuval Rottenstreich

University of Chicago - Booth School of Business

David Faro

London Business School

Date Written: July 9, 2010

Abstract

We experimentally investigate people’s evaluations of incentive pay contracts and people’s predictions of others’ evaluations of incentive pay contracts. We emphasize that the construction of evaluations and predictions often includes two substeps, involving likelihood judgment and likelihood weighting. Predictors appear to be biased at both substeps but in opposing directions. Accurate overall predictions thus sometimes reflect two errors that are of the same magnitude and thereby offset. Moreover, predictions can become more inaccurate if one step is debiased but the other is left untouched. Importantly, principals deciding whether to delegate a task are susceptible to just one of the biases. Delegation assessments are thus often flawed, reflecting a single error that is not offset.

Suggested Citation

Burson, Katherine Alicia and Rottenstreich, Yuval and Faro, David, ABC’s of Principal-Agent Interactions: Accurate Predictions, Biased Processes, and Contrasts between Working and Delegating (July 9, 2010). Organizational Behavior and Human Decision Processes, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1636705

Katherine Alicia Burson

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Yuval Rottenstreich

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

David Faro (Contact Author)

London Business School ( email )

Sussex Place
Regents
London, London NW1 4SA
United Kingdom

HOME PAGE: http://www.london.edu

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