Chapter 3: An Analytical Model
3.3 P ARTICIPATION OF THE P RINCIPAL IN M ANAGING P ROJECT E XECUTION
According to definition: 0
2 the manager will devote less effort. If the environment condition deteriorates,
however, the manager will devote more effort. ▓ When the principal has not assessed the project proposal, the decision as to
whether to execute the project if left to the manager’s sole discretion. From the outcomes of Proposition 2 we find that regardless of the original outcomes of the project execution or the environment conditions, the manager will continue to invest funds to execute the remainder of the project. In addition, when environment conditions are worse, the manager must work harder to execute the project, producing the phenomenon of commitment escalation.
3.3 Participation of the Principal in Managing Project Execution
When the principal is unwilling to assess the project 0
1and has partial effectiveness of the principal’s assessment of the manager’s execution of the project for the two stages. Therefore, 1 s
1 can be viewed as the degree of authority for the execution of the first stage that the principal grants to the manager before the first stage has commenced on the basis of the assessment of the proposal, while 1 s
2 is the degree of authority for continuing the project for the second stage that the principal grants the manager after the project has reached the milestone based on the assessment of the first stage.Suppose the principal perceives the actual environment conditions as
i b
isi. When the principal is less capable of managing the project,s
i 0
. When the environment conditions perceived by the principal are closer to those stated by the manager in the proposal,
i 1
. Conversely, when the principal is more capable of managing the project,s
i 1
, and the environment conditions perceived by the principal are closer to the actual conditions
i b
i.133.3.1 Participation of the Principal in the First Stage of Project Execution
Suppose the principal has
s ability to assess and participate in the first stage of
1 project execution and provides funding for a proposal according to his or her awareness of the environment conditions. It is still not possible to determine whether the project is successful in the first stage, so the benefits that a successful project would bring to the manager’s reputation are not considered. If, however, the project fails, the manager will suffer a loss of reputation. The optimal utility for the manager is: Observing Eq. (15), we find that when the principal is involved in the execution of the proposal at a fixed levels (i.e. awareness of the environment conditions is
1
1). If the reduction in the expected marginal loss as a result of the effort devoted by the manager (i.e.13 When environment conditions are worse (bi 1), and the principal is less willing to get involved in the project , the principal is more likely to underestimate the actual environment conditions (bi i1). Conversely, when environment conditions are worse (bi1), and the principal is less willing to get involved in the project (si0), the principal is more likely to underestimate the actual environment conditions (bi i1).
rewards
e1
rI , the manager will devote a positive effort to executing the second stage
of the project~
*0
1
e
.Since the principal has a partial ability to manage the execution of the project, his or her awareness of the environment conditions will affect the manager’s optimal effort. If the principal’s awareness of the environment changes, this is due to changes in the actual environment conditions:
As Eq. (16) shows, when the principal has a fixed level of involvement, and the actual environment conditions improve, the manager’s optimal effort will reduce.
However, when the actual environment conditions worsen, the manager’s optimal effort will increase.
When the changes in the principal’s awareness are caused by changes in his or her level of involvement:
From the outcome of Eq. (17) we find that when environment conditions are the same, differences in the principal’s capacity to control a project will influence the manager’s behavior with regard to project execution. When the environment conditions during the first stage are better than those in the proposal (
b
1
1), the greater the principal’s capacity to control a project the less effort the manager needs to devote. Conversely, when the environment conditions are worse than those in the proposal (b
1
1), the greater the principal’s capacity to control a project the more effort the manager needs to devote.The discussion on Eq. (16) and Eq. (17) can be summarized as Proposition 3:
Proposition 3:
1. When the environment conditions improve (deteriorate), meaning the principal’s awareness of the environment increases (decreases), the manager will decrease (increase) his or her optimal effort.
2. The greater the principal’s capacity to control a project, (1) When environment
conditions are superior, increased (decreased) awareness of the environment means the manager will decrease (increase) his or her optimal effort. (2) When environment conditions are inferior, increased (decreased) awareness of the environment the manager will increase (decrease) his or her optimal effort.
The total differential Eq. (15) for the relationship between environment conditions and the principal’s level of involvement produces
)
When the manager’s optimal effort is unchanged
1
Eq. (19) shows that when the environment conditions are superior to the contents of the proposal, the better the environment conditions, the lower the principal’s level of involvement. However, when the environment conditions are inferior to the contents of the proposal, the worse the environment conditions, and the lower the principal’s level of involvement. The reason for this is that under a situation of favorable environment conditions, the project can be completed smoothly according to the proposal, and the principal need not intervene. However, if environment conditions are poor, according to Eqs. (16) and (17), manager will automatically increase the effort they devote at the cost of reduced rewards to avoid the loss of reputation from a failed project, so the principal does not need to increase his or her level of involvement.
proposal, when the environment conditions are worse (better),the principal’s level of involvement is lower (higher).
Consider the effect of the principal’s level of involvement on the principal’s optimal effort and its utility
0 environment conditions are good, the manager’s utility falls as the principal’s level of awareness increases. However, when environment conditions are poor, the manager’s utility increases as the principal’s level of awareness increases. The reason for this is that the more the principal understands that the environment conditions are favorable, the less likely it will be that he or she needs to invest significant financial resources in the project. Therefore, the rewards the manager can obtain from the project fall, and the optimal effort the manager is willing to devote also falls. Conversely, if the principal learns that the environment conditions of the project are poor due to his or her increased awareness, although the manager will continue to reduce his or her optimal effort, because the principal’s willingness to invest project funds according to the proposal increases, the manager’s reward also increases, producing greater utility.
We summarize the above discussion as Proposition 5.
Proposition 5:
1. The greater the principal’s level of involvement in a project, the lower the manager's required optimal effort.
2. When environment conditions are good, the manager’s utility falls as the principal’s level of awareness is increased (decreased). However, when environment conditions are poor, the manager’s utility increases (decreases) as the principal’s level of awareness is increased (decreased).
3.3.2 The Principal’s Assessment of the Second Stage of the Project
Upon completion of the first stage of the project and the achievement of a milestone, the principal will assess whether the manager should continue the execution of the project or the project should be stopped based on the manager’s effort during the first stage and an evaluation of the environment conditions at the
second stage.14
Assuming that at the milestone, the principal has
s capacity to assess and
2 participate in the second stage of the project, the environment awareness capacity is2 manager’s utility function in the second stage is identical to the first stage. Therefore, the outcome of the analysis is the same as the first stage. This section makes direct reference to the outcome for the first stage as a basis for the principal’s assessment of and participation in the second stage.
Combining Propositions 3, 4, and 5, we find that when the actual environment conditions for the project are better, the principal has a lower level of involvement and control capability, and therefore has less influence on the risk that the manager will fail in his or her project execution. It is worth nothing that when the environment conditions are poor, because the early phase of the project did not go well, the manager may continue to execute the next stage of the failed project.
When the environment conditions for the project are poor, the manager will reduce his or her level of effort (Proposition 3.1). In this case, the principal must reduce his or her level of involvement (Proposition 4) to reduce the manager’s utility (Proposition 2). Therefore, if the principal perceives that the environment conditions in the second stage will improve, and the principal increases the manager’s authority, the manager will take responsibility for the failure of the project. If the manager expects that the utility for the second stage of the project may be zero, the manager will not be willing to risk executing the second stage.
If the principal’s capacity to control a project increases, in the event that
14 The present study explores “commitment escalation” behavior from manager. The suspension mechanism for the latter part of the project is determined by the principal or suffers from a relative of information, enabling the total loss anticipated by the manager who executed the failed project for the failure of both stages to be higher than admitting failure and suspending the project at the halfway point rather than risking implementation of the second stage.
15 Since the success of the project can be immediately determined after the implementation of the second stage, the manager’s utility for the second stage is similar, but must include the anticipated reputation benefits of a successful project.
environment conditions are inferior, increased awareness of the environment will increase the manager’s effort (Proposition 1.2) and increase the manager’s utility (Proposition 5.2), reversing the negative influence of the manager taking responsibility for project failure in the case that the manager controls the project.
Proposition 6:
When the principal perceives that the subsequent environment conditions will deteriorate:
1. The principal reduces his or her level of involvement, increasing the manager’s authority. The manager will be less willing to risk implementing the next stage of the project.
2. When the principal’s capacity to control a project is strengthened, the manager’s utility can be increased, strengthening the manager’s effort and reducing the risk of project failure.
From the discussion in this chapter we find that before the execution of the first stage of the project, the principal assesses the proposal, and when the milestone is reached makes an assessment as to whether the project should continue to the second stage. The principal’s capacity to control the environment conditions for the execution of the project are the key factor determining whether the project is allowed to proceed.
In terms of assessing the project proposal, if the principal’s capacity to control the project is higher, he or she can more accurately identify whether the contents of the manager's description of the environment conditions for the project execution reflect the actual situation. When the milestone is reached, if the principal’s capacity to control the project is higher, he or she can follow the manager’s effort in the second stage based on the outcome of the first stage. Regardless of whether the manager’s description of the environment conditions in the proposal is too optimistic or too pessimistic, or whether he or she hopes the environment conditions in the second stage will improve, this will produce a subsequent “commitment escalation” outcome from manager. The discussion in this chapter shows that if the principal can increase the accuracy of his or her evaluation of the actual environment conditions, strengthening his or her ability to control the project, he or she can effectively constrain possible “commitment escalation” behavior from the manager during the execution of the project.