Escalating Behavior to Losing Projects: Agency Theory Perspective

Abstract

This paper analyzes how the escalating behavior of an investment manager is affected by the presence and absence of high personal responsibility and information asymmetry using the laboratory decision making experiment. Drawing on agency theory, it is found that high personal responsibility and information asymmetry result in escalation of commitment to a failing projects. It is further evident that investment managers working in collective-oriented culture in Pakistan are more vulnerable to get entrapped in escalating behavior than their counterparts working in individualistic-oriented cultures. From agency perspective, this escalation of commitment arises from the divergence of interest between agent (manager) and principal (shareholders) and thus the proper incentives and controls should be practiced to align the interests of agent and principal in order to curb the escalating decisions of an agent. In this paper, we also followed the pattern of decision cases of (Harrison and Harrell, 1993). This decision-making experiment was focused on analyzing the influence of high personal responsibility and information asymmetry on managers’ commitment to seemingly losing projects. Because of this two factored analyses i.e. high personal responsibility and information asymmetry, we replicated the decision task of (Schulz and Cheng, 2002) and accordingly, the subjects were randomly assigned the different decision tasks to perform.

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