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dc.contributor.authorDouthit, Jeremy D.
dc.contributor.authorKearney, Linwood W.
dc.contributor.authorStevens, Douglas E.
dc.identifier.citationJeremy D. Douthit, Linwood W. Kearney, and Douglas E. Stevens (2012) 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. Journal of Management Accounting Research: December 2012, Vol. 24, No. 1, pp. 135-158.en_US
dc.descriptionData Availability: The experimental data used in this paper are available from the authors upon request.en_US
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dc.description.abstractGiven 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 minimal 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.en_US
dc.publisherAmerican Accounting Associationen_US
dc.relation.ispartofseriesJournal of Management Accounting Research;v.24 no.1
dc.subjectAgency problemsen_US
dc.subjectAgent cheap talken_US
dc.subjectNoisy performance measuresen_US
dc.subjectSocial normsen_US
dc.titleCan agent cheap talk mitigate agency problems in the presence of a noisy performance measure? An experimental test in a single- and multi-period settingen_US
dc.description.versionPeer reviewed
dc.rights.holderCopyright 2012, American Accounting Association

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