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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, Jeremy Douthit, Linwood Kearney, Douglas E. Stevens

Accountancy Faculty Publications

Given 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 …