國立高雄大學經營管理研究所
碩士論文
The Governance of Project Manager’s Commitment
Escalation Behavior
專案計畫經理人承諾擴大行為的治理
研究生：溫仁維 撰
指導教授：鄭育仁 博士
致謝詞 轉眼間，兩年的研究所生活到了尾聲，在碩班的這段時間，對曾經幫助我、 鼓勵我以及指導我的人，在我心中充滿感激的心。 衷心感謝鄭育仁教授，由於他盡心盡力的指導我，在寫論文上有很大的幫 助，雖然學生資質愚鈍、學識淺薄，但鄭老師仍不放棄指導我，反而熱忱鼓勵我， 要我不要放棄，感謝之情不是一般言語所能表達，本論文是在老師的指導下完成 的。無論是論文的選題、或是資料的收集，還是最終的修改，都是導師用他大量 的心血，在旁邊給我協助。鄭老師嚴謹的治學態度，對學生嚴格要求，對論文也 都認真批改，字字句句把關，提出了許多中肯的意見。能夠當鄭老師的學生，我 為自己感到慶幸。 還有ㄧ起努力的洪偉豪、王佐華兩位同學，在學業或是寫論文的過程中，他 們都給我很大的鼓勵及幫助，讓我有繼續前進的動力；同時還要感謝經管的同學 們，雖然大家在不同老師指導下，但我們都有共同的目標，因為有你們的陪伴， 在研究所的兩年內，我們留下了無數個歡笑的片段。 家人是永遠的避風港，他們總是給我最多的鼓勵、最大的支持，讓我可以專 心地完成研究所學業，感謝他們栽培，我會秉持著感恩與回饋的心，給予他們最 大的回報。 感激兩位口委員，童桂馨老師與陳筠昀老師，在百忙之中抽空來指點論文， 他們提出了ㄧ些想法和見解，讓本文在經過修改之後可以更完整。 溫仁維 於高雄 2016.7
The Governance of Project Manager’s Commitment
Escalation Behavior
Advisor:Dr. Yu-Jen, Cheng Institute of business and Management
National University of Kaohsiung
Student:Jen-Wei, Wen
Institute of business and Management National University of Kaohsiung
ABSTRAT
This paper study extends the model of Staw and Ross (1987) to explore the causes of “commitment escalation” and its governance when managers execute projects. This paper firstly applies the results of the scenario there is exists information symmetry between the principal and the drafted project proposal.
We find that:(1) When the principal is unwilling/unable to review the project proposal, the manager will inevitably accrue “commitment escalation.” (2) If the principal can partially intervene the execution of the project, the principal will perceive that the subsequent environment conditions of the project are about to deterioate, the principal may delegate more authority, to the manager for bearing the liability of project failure. The manager will reluctant to take the risk to execute the remainder of the problematic project. (3) When the actual conditions are worse, the principal reducing intervention and raising authority would make the manager less likely to take risks in executing the remainder of the project; if the principal strengthens control, over the project, it can increase the manager’s utility, improve the manager’s efforts, and reduce the risk of project failure.
We also find that if the principal can increase the accuracy of evaluating of actual environment conditions and strengthen controls over the project, then it is possible to effectively prevent the project manager’s “commitment escalation” behavior when executing the project.
專案計畫經理人承諾擴大行為的治理
指導教授：鄭育仁 博士 國立高雄大學經營管理研究所 學生：溫仁維 國立高雄大學經營管理研究所 摘要本文延伸 Staw and Ross (1987) 模型，探討經理人執行專案計畫時，發生「承 諾擴大」現象的原因及其治理之道。本文首先以委託人與經理人間資訊完全對稱 的情況，專案計畫之執行結果，作為經理人擬訂專案計畫規劃書的內容。 本文發現：(1) 當委託人沒有意願或／且沒有能力審核專案計畫的規劃書 時，經理人必然產生「承諾擴大」的行為。(2) 在委託人具有部分能力介入專案 計畫的執行時，如果委託人認知專案計畫的後續環境條件即將轉壞，委託人可提 高對經理人的授權，由經理人負擔專案計畫失敗的責任，使得經理人不願冒險執 行後續專案計畫。(3) 在實際環境條件不佳時，委託人減少介入程度，提高對經 理人的授權，經理人將比較不願冒險執行後續的專案計畫；委託人增強專案計畫 的掌控能力，可以提升經理人的效用，增加經理人努力程度，降低專案計畫失敗 的風險。 如果委託人可以提升對實際環境條件評估的準確度，並強化對專案計畫的掌 控能力，則能有效扼阻經理人執行專案計畫時可能出現「承諾擴大」行為的發生。 關鍵字：承諾擴大、專案計畫、資訊不對稱、治理
Contents
Chapter 1: Introduction ... 1
1.1RESEARCH BACKGROUND ... 1
1.2RESEARCH MOTIVATION AND PURPOSE ... 2
1.3RESEARCH CONTRIBUTIONS ... 3
1.4RESEARCH STRUCTURE ... 4
Chapter 2: Literature Review ... 5
2.1THE BEHAVIOR OF COMMITMENT ESCALATION ... 5
2.3COMMITMENT ESCALATION BY THE PROJECT MANAGER ... 14
2.4RESOLVING COMMITMENT ESCALATION ... 16
Chapter 3: An Analytical Model ... 19
3.1BASIC MODEL ... 19
3.2PRINCIPAL DO NOT CARRY OUT PROJECT ASSESSMENT ... 22
3.3PARTICIPATION OF THE PRINCIPAL IN MANAGING PROJECT EXECUTION ... 27
Chapter 4: Conclusion and Discussion ... 34
References ... 36
List of Figures
Figure 1: Two Stage Project Execution... 22Chapter 1: Introduction
1.1 Research Background
The advancement of a project tends to require a project owner (i.e., “the principal”) and a project manager. Engaging in long-term investment, the manager often faces the dilemma of how to allocate resources. The schedule of long-term investment projects are generally divided into several stages. After an organization undertakes a feasibility study, it begins to devote resources to the project. Since the feasibility evaluation of the project is based on predicted data, it is only after the project is initiated and resources have been injected that the manager can acquire real information from the project. Sometimes, the manager may realize, unexpectedly, that due to excessively optimistic predictions or major changes in external environment, the long-term investment project can no longer proceed as planned, and that the best choice for the corporation’s overall interests is to terminate the project immediately. Therefore, escalation of commitment is an individual's persistent behavior at sustaining commitment to an original decision or course of action (Babatunde, 2016).
However, in the real world, when negative feedback has occurred because of the manager’s poor decision, it is often difficult to let expended resources go. The manager will ask more resoures “throws good money after bad” in the hope that new input will make up for previous errors and produce positive outcomes in the future. The manager becomes unwilling to accept previous errors and negative feedback on the original project, attempts to avoid bearing responsibility, and takes risks in convincing the principal to continue to devote new resources to cover up previous mistakes. This behavior of the project manager is known as “commitment escalation”.
Commitment escalation is a common phenomenon in real life. For instance, an addicted gambler attempts to reclaim previous lossesleading to gambling ultimately. Also, an investor may keep buying more securities to recoup past losses caused by incorrect evaluating the trend of stock market, but only end up poorer. There was also the case of Nick Leeson,1 a trader at Barings Bank Singapore Branch, who traded in Nikkei options for private benefits, but the index plummeted, contrary to his personal judgment and predictions. Unwilling to accept earlier investment losses and in attempt
1 Source: BBC NEWS, Business: The Economy How Leeson broke the bank
to cover his personal liability for his incurred losses, he used his authority to avoid internal investigation, and appropriated bank capital to keep buying futures in attempt to drive up their value and make up for previous losses that resulted from his embezzlement of bank capital. Ultimately, he suffered major losses, causing the bank’s bankruptcy and below-price liquidation of bank assets, resulting in the collapse of Barings Bank, and shocking international financial markets. These were all classic cases of commitment escalation.
Commitment escalation does not only occur in personal actions, but also in project execution. For instance, Taiwan’s High Speed Rail and Hsuehshan Tunnel began with many promises from the project manager, but when negative feedback appeared during project construction, the manager was unwilling to accept previous errors and continued to inject large quantities of resources. Even though, ultimately, the projects were completed and became operational, construction was delayed and the budget was exceeded several times over, causing the public to doubt construction project control mechanisms as well as executive efficiency and quality. This researcher’s interest in “how to govern commitment escalation in project manager” was therefore piqued.
1.2 Research Motivation and Purpose
Domestic and foreign research on organizational and personal commitment escalation has greatly contributed to our understanding of the phenomenon of commitment escalation. However, there has been no comprehensive interpretation of how to govern manager in civic organizations to prevent commitment escalation. This is the first research motivation for this study. When civic organizations execute projects, if commitment escalation occurs in the manager, it would certainly cause major damage to the organization and the principal. The severity of this problem is deserving of attention, and this is the second research motivation for this study. Moreover, although on the whole commitment escalation has yielded a small number of successes, the vast majority of commitment escalation in projects produces problems and causes major setbacks to projects, in turn resulting in immeasurable losses to the principal in terms of organizational trust and financial resources. Even though commitment escalation is undesirable to the organization and the principal, supervisory mechanisms in the project execution process tend to be ineffective in
preventing commitment escalation. If the principal is unable to find an effective method to eliminate supervisory loopholes in a timely manner, the manager may opportunistically engage in commitment escalation. This is the third research motivation for this study.
On this basis, the main purpose of this study is: assuming that commitment escalation is inevitable in the project manager when executing a project, how should the principal establish appropriate supervisory and governance mechanisms to prevent commitment escalation, or establish a system of punishments and rewards so that the project manager can assess and discover that honesty is the better option; dishonesty has no benefits, would ruin one’s reputation, and incur stringent punishment from the organization, which would deter the manager from inappropriate behaviors. Therefore, the study modified the commitment escalation cycle model of Staw and Ross (1987) to establish effective supervisory mechanisms in the various stages of project execution (divided by time into ex-ante, interim, and ex-post) in order to prevent commitment escalation by the manager. This provides a reference for future research on civic organizations’ governance of commitment escalation by project manager.
This study referred to the commitment escalation cycle model proposed by Staw (1976) to create the basic research model to find ways to describe and interpret commitment escalation, and to broaden the basic model for extended analysis via computations and basic model analysis.
1.3 Research Contributions
In real life, commitment escalation is a common phenomenon. Attention has also been paid to the governance of commitment escalation in the past. Staw and Ross (1987) attempted to explain the cause of commitment escalation, and further proposed methods to discourage commitment escalation. However, Staw and Ross (1987) only briefly described solutions to govern commitment escalation without explaining the causal relationships of governance and their natures. Therefore, the present study modified and extended the commitment escalation cycle model of Staw and Ross (1987) to analyze and propose the mechanisms by which a principal may govern possible commitment escalation in a manager in the course of project execution.
The present study discovered that in project planning and execution, if the principal is unwilling and/or unable to evaluate the project proposal, regardless of
whether the manager was excessively optimistic or pessimistic in describing the environment conditions in the proposal, or hoped that environment conditions would improve in the second phase, it would elicit commitment escalation by the manager as a consequence.
If the principal can increase their accuracy in assessment of actual environment conditions and strengthen their control over projects, then the principal can effectively stop possible commitment escalation from taking place when the manager executes projects.
1.4 Research Structure
The remaining of this paper is organized as follows: In chapter 2, past literature concerning about the issues of commitment escalation, project, and asymmetric information are reviewed respectively. In chapter 3, we firstly create the framework of the model. Then discuss the cases of principal do not carry out project assessment and principal carries out project assessmentregimes. Chapter 4 is the conclusion.
Chapter 2: Literature Review
Although past literature on organizational and personal commitment escalation has produced major contributions to the understanding of commitment escalation, most research has focused on interactions between the manager and the project, in an attempt to discover the manager’s motivation when deciding to engage in commitment escalation, the conditions that induce commitment escalation, the methods to reduce commitment escalation, or to prove whether commitment escalation or its contingency factors exist. It is suitable to explore the perspective of the relationship between the manager and the project to study commitment escalation in the cases of gambling addiction, drug addiction, and chasing highs and lows in the stock market as personal decision-making behaviors, but this does not fully explain the occurrence of commitment escalation in organizations.
2.1 The Behavior of Commitment Escalation
The occurrence of commitment escalation behavior in real contexts depends on the psychological inclinations of the manager at the edge of reason and unreason, and is mixed with the manager’s personal actions seeking to protect reputation and face, in attempts to derive private benefit. This phenomenon has been described by Staw and Ross (1986) as a reaction to proactive change. Past studies of commitment escalation have shown that the phenomenon results from the manager’s continuous injection of resources into a failing project due to personal emotions, self-interest, or reliance on luck. Assuming that an organization does not have effective supervisory mechanisms and unconditionally supports the decisions of the manager, commitment escalation would elevate risks in organizational operations (Staw, 1976; Staw and Fox, 1977; Teger, 1980). The present study focused on the definition of commitment escalation, using different theoretical perspectives and research aspects to increase our understanding of commitment escalation.
2.2.1 The Definition of Commitment Escalation
Staw (1976) was the first to propose the concept of commitment escalation. Later, Staw and Ross (1987) proposed the factors of commitment escalation and methods for its governance. Escalation of commitment is an individual's persistent behavior at sustaining commitment to an original decision or course of action (Babatunde, 2016).
Staw (1981) used experimental research on losing loan departments in investment companies to define commitment escalation as follows: In the real world, the manager is faced with a project with negative feedback due to personal errors in decision-making, but finds it difficult to let go of resources already devoted to the project and seeks to inject new resources, hoping that this would make up for failures in earlier decision-making and produce positive results in the future. The manager is unwilling to accept previous errors in the project with negative feedback, attempts to avoid responsibilities, and takes risks to convince the principal to input new resources to cover up previous errors in decision-making. This is commitment escalation.
When past scholars have researched the behavior of commitment escalation, they tended to focus testing on the rational and irrational psychological decision-making processes at the depths of morality, in which the manager attempts to cover up previous decision-making errors, using personal reputation and job authority to challenge the principal’s supervisory mechanisms and seek injection of new resources in an attempt to bail out previous failures in decision-making (Staw, 1976; Staw, 1981; Staw and Ross, 1987; Garland, 1990). From a different perspective, Babatunde (2016) uses a sample of 76 participants from a Minnesota community college and applies hierarchical regression. The author suggests that it is perceived self-efficacy but dispositional optimism will predict leaders' escalation of commitment behavior.
2.2.2. Different Theoretical Views of Commitment Escalation
When past scholars researched commitment escalation, they primarily utilized the perspectives of cognitive dissonance theory, agency theory, prospect theory, and the gambler’s fallacy.
From cognitive dissonance theory, Festinger (1957) proposed that cognitive dissonance meant that when the manager’s personal beliefs, organizational beliefs, and values are inconsistent in the decision-making process, and the manager attempts to rationalize and legitimize personal beliefs and behaviors, when negative feedback results from a personal decision and progress differs from expectations, the correct option is to be forced to admit that decisions were incorrect and to terminate the project. As the manager seeks to shirk responsibility and maintain their reputation, they are unwilling to admit past errors in decision-making, overlooking warnings from negative feedback, and risking injection of more resources to prevent erroneous
decisions from threatening their existing self-reputation and to cover up failures from past decisions.
Shapira (1995) pointed out that cognitive dissonance is caused by the manager’s past experiences of success, leading the manager to believe in the high quality of his decisions, and that rates of future success can increase based on past successful experiences. Subsequent experiments have proven that past successful experience produces misconceptions in subjects faced with negative feedback, believing that negative signals are short-term necessities and that personal actions can affect and even change final outcomes (Langer and Roth, 1975; Hayward and Hambrick, 1997).
From the perspective of agency theory, Berle and Means (1932) found that when a company’s shareholder equity is dispersed, there is less constraint on the management ranks. At this point, an opportunistic manager can maximize one’s own efficacy in using company resources to deviate from the company’s goal of profit maximization and to seek one’s own interests. After this view was proposed, academia began to broadly research the agency problem caused by the separation of controlling rights and ownership rights in companies. Later scholars also considered vendor actions and management perspectives in the agency problem, pointing out that in order to make the agent make the fewest decisions, it would be impossible for there to be no problem of agency costs between the principal and the agent (Baumol, 1959; Cyert and March, 1963; Harrison and Harrell, 1993).
Jensen and Meckling (1976) believed that the agency problem arises when the principal and the agent have different objectives, the cost incurred by the principal in supervising the agent is high, and the supervisory outcome may be futile. Agency problems mainly arise because under the separation of organizational ownership and management, the agent holds no equity, and does not need to bear full responsibility for losses due to their decisions, therefore when the manager executes tasks for the organization, emphasis may be on self-interest rather than the maximization of profits for the organization. This affects the operational performance and interests of the company. Generally speaking, agency costs must exist between the principal and the agent in order to optimize decisions made by the agent. Eisenhardt (1985) believed that the agency problem primarily arises from: 1. Oppositional objectives exist between the principal and the agent; 2. The principal supervises agent actions in the context of asymmetric information. Agency costs tend to be high without being
effective.
Many later scholars used empirical methods in researching the agency problem. Some scholars believed that internal reward systems such as pay raises for agents, increasing shareholdings, and stock dividends policies should be used to reduce the pursuit of self-interest in manager (Holmstrom, 1979; Jensen, 1986; Lipper and Pilotte, 2000). Many scholars proposed that externally, there should be close connections between case-by-case salary systems for agents and organizational performance, to incentivize the manager’s pursuit of company profit maximization; if the agent’s performance is less than expected, there would be no salary, and the principal would ask the agent to resign. This would have proactive supervisory effects on elevating the work efficiency of agents (Fama, 1980; Holmstorm, 1979; Grossman and Hart, 1983; Jensen, 1983; Lambert and Larcker, 1985).
The agency problem is primarily caused by asymmetric information. If the period of asymmetric information is divided into before signing the contract (ex-ante) and after signing the contract (ex-post), then ex-ante asymmetric information or knowledge between the principal and the agent tends to cause the problem of adverse selection. After signing the contract, the impossibility of observing or verifying agent actions may result in the problem of “moral hazard” (Barnea et al., 1981; Guesneric, Piard, and Rey, 1988; Bergen and Walker, 1992). The contract is designed to handle these two types of problems, so that after the contract (the agency relationship) is established, the principal can establish an effective mechanism by which to evaluate and reward the performance of the agent, so that the agent can work according to the will of the principal.
The principal’s stringent assessment is necessary to improve the quality of the agent’s execution of decisions. However, in reality, when the principal cannot be sure whether the manager has truly acted in accordance with organizational interests, it would be necessary to increase information monitoring, but this would require additional costs. Out of consideration for the circumstances, the principal would usually not execute the plan for complete monitoring in order to avoid additional monitoring costs and to reduce agency costs. As a result, the manager has opportunities to avoid responsibilities and seek private interest. When the two sides have different objectives and there are severe errors, the correct course of action is to choose to terminate and for the manager to bear the responsibility for failure.
However, the manager may believe that admitting defeat would constitute damage to one’s personal reputation; instead, the manager seeks to input new resources to save the failing project, resulting in agency problems such as adverse selection and moral hazard. This necessitates an increase in agency costs incurred by the organization to supervise agent operations (Kelley, 1973; Northcraft and Neale, 1986; Ronald, 1994; Horn, 1995; Li and Liang, 1998; McNamara, 2002).
From the perspective of prospect theory, Kahneman and Tversky (1979) believed that decision-making by manager is often faced with uncertain contingency factors. In the event of negative feedback, a manager may be unwilling to accept losses and may start to pursue risks. Rather than bear responsibility and punishment for failed decisions and suffer certain losses, the manager would rather risk injection of new resources in a failing endeavor to try to turn the corner and reach a satisfactory outcome in the future.
In their research on psychological factors and commitment escalation of manager in prospect theory, Arkes and Blumer (1985) pointed out that the manager’s psychological and emotional response is often affected by regret aversion, self-control, and over-confidence. The manager’s cognition of a certain selected action plan, remuneration, and scenario is affected by the framing of the problem, such as social norms, habit, and personal preferences, usually being risk-averse to profiting circumstances while risk-seeking in losing circumstances. In addition, anger and fear (Tsaiet al., 2010), goal difficulty (Lee et al., 2015) can also be the source of commitment escalation.
Sunk costs refer to irretrievable losses from past investment decisions. Economists assert that sunk costs should be disregarded in investment decisions. However, studies on commitment escalation have shown that when the manager is faced with negative situations arising from previous resource input, due to unwillingness to accept losses, new resources are injected in the face of negative feedback. As a result, sunk costs do not “sink” as they should, but rather continue to figure in investment decisions (Staw, 1976; Arkes and Blumer, 1985; Tirole, 1988). In empirical studies focused on organizations, Staw and Hoang (1995) researched the relationship between the time NBA teams give their players on the court and their contract salaries, and found that the higher the contract salary, the greater the chance a player is present on the court. After contract salaries have been set and cannot be
changed, player salaries become a team’s sunk cost. When the sunk cost is high, the team has greater tolerance for poor performance from players; evidently, the sunk cost did not sink.
In the empirical study on the gambler’s fallacy in game theory, Tversky and Kahneman (1981) found that gamblers believe that the probability of a win is related to the number of losses in the past. When gamblers make bets, they believe that the likelihood of a win increases with the number of losses they have experienced. When they continuously lose and place more bets, they believe that they are only going through a “dry spell”, and that the chances of winning on the next bet are increased. Since they cannot let go of past losses, they continue to make more bets in an attempt to lessen their losses, but instead become more deeply mired.
In a casino setting, since gamblers are generally playing games of luck and outcomes are determined in mere instants, gamblers tend to be affected by their expectations and past experiences. When gamblers suffer greater losses, they are inclined to inject more bets. This outcome explains why gamblers are still intent on betting even after losing all of their money.
2.2.3 The Study of Commitment Escalation in Different Fields
Commitment escalation often occurs in different fields; this section summarizes its occurrence in behavioral science, sociology, management, and economics.
In the field of behavioral science, scholars found in researching gambling psychology that because gamblers are not willing to let go of their losses, they double down in attempt to win back their money, which proves that the rejection of sunk costs by gamblers is a type of commitment escalation (Bandura, 1977; Haunschild and Miner, 1997; DiMaggio and Powell, 1983; Scott, 1991; Aloysisus, 2003; Delios, 2004). The empirical study by Moon et al. (2003) found that when the principal is unable to propose effective mechanisms to supervise decision-making by the manager, commitment escalation can accelerate. Some studies have shown that asymmetric information is an important cause of the manager’s commitment escalation; the manager tends to seek personal interest by using asymmetric information to cover up negative feedback: for instance, they release beneficial information early on in a project and exaggerate the benefits of future actions to opportunistically derive profits; they conceal negative feedback appearing during a project; then they release new
positive information at the end of the project in attempt to inject more time and resources in attempt to cover up earlier mistakes (Brockner and Rubin, 1979; Conlon and Wolf, 1980; Nisbett and Ross, 1980; Arkes and Blumer, 1985; Staw and Hoang, 1995; Chow et al., 1997; Dellarocas, 2003; Ferraro, 2008).
From the sociological perspective, when some scholars researched reputation, they pointed out that although excessive attention to reputation by the manager can avoid commitment escalation, reputation itself is a cause of commitment escalation. In a strong ethical environment, the manager believes that disclosure of profiting for oneself without knowledge of the principal would be shameful, severely affecting the manager’s social status and moral reputation. This perspective may inhibit the manager’s commitment escalation. However, in a setting in which the manager seeks to cover up personal mistakes and inject new resources to rescue a failing action, and attempts to avoid bearing responsibility and damaging their own reputation, it would not be possible to break the cycle of commitment escalation (Staw, 1976; Teger, 1980; Staw, 1981; Staw and Ross, 1987; Bazerman, 1990; Garland, 1990; Ross, 1998). In groups with high cohesion, the principal is less able to tolerate mistakes by the manager; in order to protect personal reputation, the manager tends to be more willing to take risks to save decisions that have already failed, thus making commitment escalation more likely (Thompson, 1976; Pratt and Zeckhauser, 1985; Harrell and Harrison, 1994; Lant and Hurley, 1999; Keil and Montealegre, 2000; Harrison and Shimizu, 2006).
In terms of culture, the empirical study by Chow et al. (1997) found that Chinese collectivist culture makes manager less willing to admit failure, thereby making commitment escalation more likely. At the same time, they advised that the cultural values of the manager must first be considered to lower commitment escalation. Research of cultures in Finland, the Netherlands, and Singapore found that there were negative correlations between the manager’s decision-making risks and commitment escalation. Even in countries with different cultures, the context of high decision-making risks tends to produce low commitment escalation (Keil and Montealegre, 2000; He and Mittal, 2007). Salter and Sharp (2001) researched how national cultural differences affect commitment escalation by evaluating transnational companies of the United States and Canada, and discovered a significant correlation between commitment escalation and cultural differences; however, senior manager
were less likely to be trapped by commitment escalation.
In terms of risk inclination and amount of resource input, Keil and Montealegre (2000) explored the correlations between risk inclination, amount of sunk cost, and willingness to continue commitment. Experimental research outcomes showed that the amount of sunk cost and perceived risk is very important to whether the manager continues investment in a project. There is an inverse relationship between the manager’s risk inclination and risk perception, and there is a direct relationship between the manager’s risk inclination and commitment escalation. Huang et al. (2016) investigate the relationship between free cash flows and escalation behavior in the long-term stock buying decisions for the firms listed in Taiwan. They find that managers tend to exhibit the escalation behavior in the long-term equity investment. Devigne et al. (2016) track 1,060 venture capital investments in 684 European technology companies and show that domestic investors tend to escalate their commitment to a failing course of action, while cross-border investors can efficiently terminate their investments. The reason is that the international investment committees of cross-border investors can act as organizational safeguards against individual decision biases.
In Moon’s (2001) study of the effect of personality traits on commitment escalation, personality traits were divided into the two dimensions of sense of duty and achievement striving, in order to explore the correlation between these dimensions and commitment escalation. Research results showed that individuals with higher inclinations toward achievement striving are more likely to experience commitment escalation. Individuals with greater sense of duty are less likely to experience commitment escalation because they are oriented toward the overall interests of the organization.
From the field of management, when scholars researched the relationship between information transparency and the manager’s forfeiture of self-determination, they discovered that commitment escalation increased with insufficient decision-making transparency by the project manager (Alchian, 1972; Brockner et al., 1979). Colon and Wolf (1980) believed that increased supervisory frequency would lead to greater decision-making transparency and reduce the likelihood of commitment escalation. In order to benefit both the principal and the agent, the principal must emphasize two points: 1. The principal must design effective
monitoring and incentive mechanisms; 2. The principal must allow the project manager to receive the benefit of improved performance.
When researching change in commitment affecting investment decisions, certain scholars have proposed that when organizations seek to avoid commitment escalation, they should organize plan check points for projects as part of management practice and require project progress reports from the manager, increasing the conveyance of negative feedback. Making information open and avoiding asymmetric information can indeed reduce commitment escalation by the manager (Harrison and Harrell, 1993; Kirby and Davis, 1998; Lant and Hurley, 1999).
In studies on the delineation of responsibilities, scholars believe that establishing good budget review systems and mechanisms with which to evaluate performance by the manager would help clarify responsibilities, so that the manager would not blindly escalate commitment (Dipankar, 1995; Ruchala, 1996).
In studies on agency theory, certain scholars discovered that agents with extremely good or bad reputations, and those who prefer risky projects, tend to experience commitment escalation, particularly during stage transitions as agents execute projects (Miller, 1997; Keil and Flatto, 1999; Keil and Montealegre, 2000; McNamara et al. 2002).
There have also been many studies on commitment escalation in the field of economics. An empirical study on the effect of organizational auditing governance on commitment escalation showed that subjects tended to be influenced by the difficulty of organizational auditing in the project, severity of liability and punishment to be borne by the manager, and whether self-justification tendencies exist in manager’ personal morals and traits. Research results showed that if organizational auditing is stringent in project execution, commitment escalation is reduced because the manager would be punished for covering up personal decision-making errors and for avoiding responsibilities, and would suffer reputational damage (Kelley, 1973; Jensen and Meckling, 1976; Fox and Staw, 1979; Northcraft and Neale, 1986).
Harrison and Harrell (1994) found in a study on asymmetric information that when information is asymmetric, the manager would be strongly inclined to continue injecting capital into a failing project.
occurrence of commitment escalation is sunk costs. Due to sunk costs including money, time, and effort already expended, the manager would engage in commitment escalation. The study found that the amount of budget input is directly related to the effect of sunk costs (Tversky and Kahneman, 1981; Garland, 1990; Garland and Newport, 1991). The study on sunk costs by Arkes and Blumer (1985) showed that the manager’s cognition of a certain selected action plan, remuneration, and scenario determines the choice ultimately made by the manager. The manager’s cognition of these factors is affected by framing of the problem, such as social norms, habit, and personal preferences, usually being risk averse to profiting circumstances while risk seeking in losing circumstances.
Some scholars have found a negative correlation between decision-making risks and commitment escalation; this means that higher decision-making risk was linked to lower inclination for commitment escalation (Northcraft and Neale, 1986; Bazerman et al., 1990; Schaubroeck and Davis, 1994).
Research on negative feedback information has shown that definitive and clear negative feedback can effectively reduce commitment escalation (Garland, 1990). In some empirical studies on the relationship between project completion information and commitment escalation, scholars found that for the agent in the decision-making process, project completion information has a greater effect on commitment escalation than sunk cost information (Conlon and Garland, 1993; Garland and Conlon, 1998).
The study by Keil et al. (1995) on the quantity of alternatives found that when there are other alternatives into which the manager can inject capital, commitment escalation by the manager can be significantly reduced.
2.3 Commitment Escalation by the Project Manager
Commitment escalation by the project manager is a common phenomenon, which many scholars have attempted to resolve. This section reviews past studies on project characteristics and psychological traits evinced by the manager when executing projects to postulate on the causes of commitment escalation.
2.3.1 Characteristics of Projects
A project integrates human resources and other resources into a temporary organization to achieve a specific objective (Cleland and King, 1983; Tuman, 1983).
Projects are generally broad in scope, involving difficulty in controlling costs, and tend to be one-off, uncertain, and involve asymmetric information; they are considered work involving a high degree of risk (Meredith and Mantel, 1989; Ayas, 1997). Kerzner (1984) believed that projects have certain start and end dates during which a definitive goal must be completed; the manager must control resources, costs, progress, process, and work performance in different stages.
Projects are often one-off, variable, and uncertain; under these premises, the manager tends to have more information than has the principal, allowing the manager to be opportunistic in regard to the project (Ouchi, 1977, Lewis, 1995; Gido and Clements, 1999). Oya and Walter (1998) pointed out that projects must be divided into execution periods and stages, and resource operations must be flexible and variable in coping with environment changes. When an opportunistic manager excessively concerned with personal short-term gains executes a project, and the principal has failed to implement stringent auditing, and negative feedback in a project cannot be discovered through auditing, then commitment escalation is likely to occur (Davis, 1989; Adams, 1996).
2.3.2 Characteristics of the Manager when Executing Projects
According to Xia and Lee (2005), manager who pay too much attention to personal reputation tend to express achievements with grandiosity; when negative feedback appears in a project, such manager tend to be unwilling to face the errors in their decision-making or to bear the responsibilities, as they attempt to cover up and recover from the losses due to incorrect previous decisions. When investigating the issue of reputation, Kreps and Wilson (1982) pointed out that commitment escalation is unlikely to occur for manager who emphasize good reputation; commitment escalation occurs when there is too much emphasis on reputation leading to avoidance of personal decision mistakes. When executing a project, these two phenomena tend to occur: 1. Manager who exaggerate their performance attempt to shirk responsibility and avoid harm to their reputation by covering up losses and inject further resources to save failing plans when a project is faced with negative feedback. 2. In order to create a positive long-term reputation, the manager would not rashly engage in commitment escalation to damage their reputation (Milgrom and Roberts, 1982; Dellarocas, 2003).
From the perspective of opportunism, the research by Kelley (1973) on project investment behaviors found that opportunism would indeed lead to commitment escalation. The manager would tend to opportunistically seek personal short-term gains using fraudulent methods, exaggerate achievements before the project, and inflate performance reports in the interim, resulting in increased supervisory costs for the project as well as reduced economic efficiency. When negative feedback appears in a project, the manager seeks to cover up errors caused by opportunism, to avoid responsibility, and to seek new resource input to save a failing project. Such decisions made by the manager may result in greater losses in the organization (Williamson, 1985; Northcraft and Neale, 1986).
2.4 Resolving Commitment Escalation
2.4.1 Literature Research on Ways to Resolve Commitment
Escalation
Commitment escalation is common. Organizational supervision of projects may be divided into the three stages of ex-ante, interim, and ex-post. Ex-ante supervision primarily involves review of plan rationality and feasibility; interim supervision involves reviewing changes made to a plan when negative feedback appears in a project; ex-post supervision refers to the organization’s audits of the efficacy of the manager who executed the project, taking necessary and appropriate measures (rewards or punishments) when a project concludes.
Establishing reputation can effectively achieve long-term benefits for the organization, making it impossible for gains to be made from negative opportunistic actions, thereby limiting opportunistic behaviors (Kreps and Wilson, 1982; Milgrom and Roberts, 1982; Weigelt and Camerer, 1988; Dellarocas, 2003). Comparison of short-term and long-term corporate operational advantages found that unlike vendors that obtain cooperative relationships from opportunistic fraud based on short-term interests, vendors that honestly cultivate reputable commitments are more likely to achieve long-term interests and trustworthy reputations. The adoption of a salary system based on case performance can constrain the project manager in pursuits that are dedicated to maximizing profits for the organization (Karpoff, 1994; Mailath and Samuelson, 2001). Thus, it is possible to organize and establish market-regulated
mechanisms and provide incentives and punishments; on one hand, the manager can receive reasonable remuneration, while on the other hand, disciplinary governance can be imposed on the manager for duties to be properly carried out.
2.4.2 Deterrence Mechanisms Against Commitment Escalation
According to some scholars, the principal’s governance of commitment escalation caused by the agent may be conducted from the perspective of reputation, which is a cause of commitment escalation as well as the method of its avoidance. The manager excessively concerned with reputation tends to be unwilling to face personal mistakes in decision-making, attempts cover-ups of negative feedback, and avoids bearing responsibility, resulting in commitment escalation. When the principal discovers that the manager has a negative reputation, it would make long-term cooperation and trust between the parties more difficult, which would also cause damage to the manager’s reputation as one faces litigation and financial loss. Since these outcomes are undesirable to the manager, commitment escalation is less likely to occur (Kreps and Wilson, 1982; Milgrom and Roberts, 1982; Dellarocas, 2003). In addition, one group of scholars conducted empirical research on using reputation to govern the moral risks and adverse selection in agency theory, pointing out that when the manager emphasizes long-term reputation and has a strong ethical environment, even if the principal often has insufficient information in the project process, the manager would still consider the pursuit of self-interest inappropriate, and that any disclosure would seriously damage one’s personal reputation, credit, social status, and moral reputation. This would constrain commitment escalation in the manager (Staw, 1976; Teger, 1980; Staw, 1981; Staw and Ross, 1987; Bazerman, 1990; Garland, 1990; Ross, 1998; Mailath and Samuelson, 2001). The study further found that an established reputation can create long-term benefit for the organization and gain trust form the principal, so that opportunistic manager with poor reputations would not engage in such actions because there are no gains to be made (Kreps and Wilson, 1982; Milgrom and Roberts, 1982; Weigelt and Camerer, 1988; Mailath and Samuelson, 2001; Dellarocas, 2003).
Fox and Staw (1979) conducted an experimental study from the perspective of auditing and punishment, finding that commitment escalation decreases when the manager discovers organizational punishments of demotions, fines, and termination
due to mistakes in decision-making. The organization can use ex-ante, interim, and ex-post supervision and auditing of project execution to restrain the manager in commitment escalation (Dipankar, 1995; Ruchala, 1996; Kirby and Davis, 1998). Woods et al. (2012) develop a model to extend Staw’s (1981) research on escalation of commitment. They suggest that private family businesses can properly use of outside board members to avoid commitment escalation.
When groups receive negative feedback on their progress toward a set goal, they often escalate rather than temper their commitment. Wieber et al. (2015) suggest that initiating a self-distancing response can offset such escalation.
Payoffs may also be used to resolve the problem of commitment escalation. Reward systems including salary boosts, increased shareholdings, and dividend policies for agents can all reduce their pursuit for self-interest (Holmstrom, 1979; Jensen, 1986; Lipper and Pilotte, 2000). In addition, some scholars have pointed out that the principal can provide reasonable and appropriate remuneration to the agent on a case by case basis according to personal effort and work performance, so that the manager seeks to maximize profits for the individual and the organization (Karpoff, 1994; Dowers, 1997). However, if the agent’s work performance is less than satisfactory, the principal can also require that the agent take responsibility for failed decisions by imposing punishment including fines, demotions, and termination (Holmstorm, 1979; Fama, 1980; Grossman and Hart, 1983; Jensen, 1983; Lambert and Larcker, 1985). For mitigating the escalation behavior, corporate governance mechanisms play a contributory role. (Huang et al., 2016)
Chapter 3: An Analytical Model
Within modern organizations, there is a separation of ownership and management. As work becomes increasingly specialized, projects are often carried out by manager with specific technical expertise. Owners audit and supervise the work, whereby the owner (the “principal”) entrusts the execution of project to manager.
Since principals, however, are often unable to truly understand the substance of projects, and because execution of such projects is often a long-term endeavor, there is information asymmetry between principals and agents on the amount of effort devoted to project execution by manager as well as the necessary environment conditions. Although principals assess projects before they are implemented, monitor them during execution, and evaluate them upon completion, due to a lack of technical expertise and the existence of information asymmetry, principals are generally only able to evaluate the results after projects have been completed.
Although manager have technical expertise, and will apply a certain level of effort to the project, they cannot fully control the environment conditions they may face during project execution. Manager may only discover that environment conditions are not as favorable as first envisioned once a project is approved and the execution process begins. When this occurs, manager are often reluctant to admit defeat and continue the execution of the next stage of the project hoping that by applying more effort, environment conditions will produce a positive change, reversing the failures of the previous stage and resulting in a final project that meets its intended target. This phenomenon is known as “commitment escalation”.
3.1 Basic Model
Suppose a principal is considering a project and asks a manager to carry out planning for the project. After planning, the manager considers the project to be feasible and presents a proposal to the principal for assessment. The proposal divides the project into two stages and invests project funds 2I, with investment of project funds I required at each stage. When we do not take into account the time discount factor, the required funds for each stage are the same. During the project execution, the manager promises to devote effort ei, ei 0, i1,2.For devoting ei, it cost the manager (ei)ei2/2 disutility, where, is a positive constant parameter,
and (0)0, 0 i e , 0 i ie e
。The manager anticipates that he will encounter bi environment condition in each stage, i1,2. bi (0,1), bi 1, and
1
i
b respectively denote the environment condition of stage i is lower than, equal to, higher than proposal’s expectation. If the project successfully implements under the planning of proposal, it will accrue a value of V2 for the principal. Assume that
I
V 2
2 , at this point, the manager can gain G(ei,bi) benefits,2 , 3 and 0 ) 0 , ( ) , 0 ( bi G ei G , 0 i e G , 0 i ie e G , 0 i b G , 0 i ib b G , 0 i ib e G . Since the
funds needed for the project and the value created by the project are both related to the amount of effort the manager devotes as well as the environment conditions, in this paper, project funds and project value are a function of the following two variables: I(ei,bi), and Iei 0, Ieiei 0, Ibi 0, Ibibi 0, Ieibi 0. After the
project has commenced, the manager can obtain a ratio of the project funds for each stage as a reward r , rI , 4r[0,1]. If the project fails, however, the value created by the project for the organization is 0, and the loss for the organization is the funds invested during the execution of the project.5
After the principal has received the proposal from the manager, there is a probability of that the principal will carry out an assessment, [0,1]. Since technical knowledge is required to fully understand the contents of the project, we assume the verifiability6 of the project is , [0,1]. Therefore, the principal has an expected level of understanding for the technical aspect of the project of ,
] 1 , 0 [
. When the principal has a lower level of understanding for the project, the principal is more likely to accept the opinions of the manager. Therefore, the probability that the principal will approve the project based on the assessment of the manager is 1.
When the first stage of the project is fully executed and the project reaches the
2 Here “utility” refers to intangible utility, for example a recognition of one’s capabilities or enhanced
reputation as well as good prospects for development within the organization.
3 If the manager has put in a greater effort, or faced worse environment conditions, he or she receives
greater benefits from the execution of the project.
4 Here, “rewards” can be viewed as the manager’s salary during the execution of the project .If the
project is only executed for one stage, and the manager receives rI rewards .However, if the execution of the second stage is completed, the manager receives a total of 2rIrewards.
5
If the project fails after execution of only one stage, the loss to the organization is I . However, if both stages have been completed, the total loss to the organization is 2 . I
milestone, the principal carries out a midterm review. The principal is not personally involved in the project execution and has the same level of understanding as he or she had at the start of the project. Therefore, the probability of continuing the project in accordance with the manager’s recommendation is still 1. If the principal decides to end the project at this point, the loss to the organization is Iand the loss to the manager is L(ei,bi), and 0
i e L , 0 i ie e L , 0 i b L , 0 i ib b L , 0 i ib e L .7,8 From
the definitions of G(ei,bi) and L(ei,bi), This paper assumes that for a manager, the losses for a failed project are greater than the benefits from a successful project, which can be represented by L(ei,bi)G(ei,bi). However, if a manager devotes extra effort in the execution of a project, even though the project failed, the positive evaluation of the manager will still be higher than in the case of a successful project, which we can represent as
i i e e G
L
.
Through execution of the first stage of the project, manager already have information about project outcomes. If the outcomes reach or exceed the expected performance in the original proposal, manager will naturally recommend that the project continue. If the outcomes do not reach the expected outcomes in the original proposal, manager are still willing to risk the possibility of failure in the second stage and continue with the project. The reason is that, in order to avoid the loss in the first stage, manager hope that in the second stage, an improvement in environment conditions or greater effort from the manager will provide a possibility of reversing the loss in the first stage. Therefore, regardless of whether the first stage is a success or a failure, manager have an incentive to recommend to the principal that the project continue on to the second stage.
7
Here, “losses” refers to intangible losses. This is because the manager is an employee of the principal. Therefore, even if the project fails, according to the law the principal cannot seek compensation from the manager. However, the manager will still get paid rewards during the period of project execution. If the project fails, the manager may be dismissed or deemed as incompetent, suffering a loss of reputation within the organization and obstacles to career advancement.
8 If the manager has put in a greater effort, or faced worse environment conditions, he or she suffers a
The two-stage project is shown as Figure 1:
3.2 Principal Do Not Carry Out Project Assessment
When a manager proposes a new project, the principal, under certain circumstances, may not carry out a project assessment because: (1) there is complete information symmetry between the principal and the manager; (2) the principal is not willing to assess the proposal; or (3) the principal does not have the ability to assess the proposal. This section discusses these three cases.
3.2.1 Perfect Symmetric Information between the Principal and the
Manager
The first scenario in this section is one of complete information symmetry between the principal and the manager. The environment conditions and the effort of the manager, which are observable factors, serve as a benchmark for the subsequent discussion.
Since information is completely symmetrical in this case and environment conditions and the manager’s effort can both be observed, in this case, b1b2 1,
e e
e1 2 . The contents of the project can be fully verified, where 1 such that the principal does not need to carry out a project assessment, and 0. Therefore,
0
, making 11. This means that as long as the manager believes the project to be feasible, the principal will authorize the manager to proceed in executing the project.
When the principal observes the environment conditions and the expected project outcomes, he or she will know the minimum effort required from the manager for success in the first and second stages of the project.
Milestone (Midterm Check)
First Stage: (I,b ,1 e ) 1 Second Stage: (I , 2
b ,e2)
Initial Assessment
(1) Final Evaluation
When the manager obtains the maximum total utility as planned in the second stage project outcomes, this is expressed as follows:
) ( )) ( ) ( ( 2 )) ( )) ( ) ( ( )) ( ) ( ( max e G e e rI e G e e rI e e rI USI e (1)
The FOC of Eq. (1) is
0 ) ( 2 / e e SI G e rI de dU (2) SOC 0 ) ( 2 / 2 2 ee ee SI G rI de U d (3)
Solve Eq. (2) obtains
2 / ) 2 ( * e e G rI e (4)
From Eq. (4), under symmetric information, the principal can observe that the manager will pay (2rIeGe)/2 effort. As long as the principal observes that the manager is willing to devote (2rIeGe)/2 of effort, then the project can be smoothly completed according to the manager's proposal, achieving the principal’s desired project outcomes.
Since Ge 0, Ie 0, in order to ensure that the effort devoted by the manager is positive, we assume Ge 2rIe , meaning that when manager devote effort for the successful execution of a project, the resulting increase in reputation is greater than the resulting decrease in total rewards, meaning that the manager is willing to devote a positive amount of effort, e* 0.
Since the project proposal is based on complete information symmetry and the principal has full ability to observe the environment conditions, we can summarize the contents of the manager’s project proposal from the discussion above as Proposition 1.
Proposition 1:
The contents of the project proposal are: Assuming the environment conditions for the
two stages are stable at bi 1, i1,2,and for each stage the manager devotes
2 / ) 2 ( * e e G rI
and gains 2V(e*,1).
3.2.2
The Principal Is not Willing and/or Is Unable to Assess the
Project
If the principal is entirely unwilling to assess the project, 0, regardless of whether the contents of the project can be verified, 0; when the principal is entirely unable to assess the project, 0, regardless of whether the principal is willing to assess the project, 0; and when the principal is both entirely unwilling and entirely unable to assess the project, 0, 0. Each of these three situations produces 0, so 11. Even when the principal fully authorizes the manager to execute the proposed project, the principal will not observe the environment conditions or the effort devoted by the manager. This section will discuss each of these three situations.
When the manager holds private information about him or herself and environment conditions cannot be observed, the principal can only examine the project outcomes after the project has been fully executed and the outcomes are known. The process of project execution is determined entirely by the manager. In addition, before the occurrence of events during the execution of the first stage, manager do not know the current environment conditions. According to the proposal, however, based on b11, they must devote e effort so that when the first stage is *
complete, the outcome promised in the proposal, V(e*,1), is reached.9
If the project is not complete or does not result in the outcomes that were expected, its value is 0. If the manager abandons the project after the end of the first stage,10 the loss to the organization is I(e*,1). If the principal only discovers that the expected targets were not reached when examining the project outcomes after completion, the loss to the organization is 2I(e*,1).
During execution of the first stage of the project, when the manager devotes e 1
9 Only the manager knows if this outcome has been achieved. At the end of the first stage, because the
principal is unwilling and/or unable to make an assessment, he or she cannot find out the outcome of the first stage.
10 At this point, the manager proposes the abandonment of the project and the principal agrees
effort under b environment conditions, utility is maximized as follows:1 11 ) , ( ) ( ) 1 , ( max 1 * 1 1 1 1 b e L e e rI UNV e (5) The first order condition in Eq. (5) is:
0 / 1 1 1 1 e NV L e de dU (6) From Eq. (6) we can obtain the optimal amount of effort the manager should devote when the environment conditions in the first stage b are fixed: 1
0 / ˆ 1 * 1 Le e (7)
From Eq. (4) we find that during the first stage, manager must devote a positive effort. If the manager devotes effort /
1
1 Le
e , when the milestone is reached, the planned project outcomes can be achieved. Since the optimal effort ˆe1* required by
manager to complete the project is dependent on the environment conditions, from 0 / / ˆ 1 1 1 * 1 db Leb e
d we find that when the environment conditions during the
actual execution of the project are better than those predicted in the proposal, the manager’s optimal effort is reduced. Conversely, if the environment conditions deteriorate, manager must devote more effort in order to reach the planned project outcomes.
Comparing Eq. (4) and Eq. (7), we obtain:
/ ) ( ˆ 1 * 1 * e e e G L rI e e (8) From Eq. (8) we can find when the principal is unable to observe the manager’s effort, if the marginal utility (rIeGe)/ that can be obtained from the execution of the project according to the proposal is greater than the actual marginal loss /
1 e L , meaning ˆ1* 0 * e
e , the manager has an incentive to devote an optimal effort than is
11
The present study examines the phenomenon of commitment escalation among manager. Here, we only consider the case of failure in the first stage. The reason is that if the project achieves a positive outcome in the first stage, the manager will naturally decide to execute the project in the second stage, even if the overall project may ultimately failure if environment conditions worsen or the manager does not put in sufficient effort into the second stage. This situation is not covered by the present study. Conversely, if the first stage does not reach the planned targets, the manager may choose to abandon the execution of the project for the second stage, immediately establishing the losses. However, when the manager finds that the outcomes of the first stage are not satisfactory, he or she may choose commitment escalation continuing execution of the project in the second stage, and increasing his or her effort or hoping for improved environment conditions. When this happens, the benefits or the losses from the success or failure of the project will only be realized on competition of both stages.
less than that promised in the proposal. When the manager reduces his or her effort, at the end of the first stage, the project outcomes obtained by the manager cannot meet the levels promised in the proposal. When combined with a deterioration of the environment conditions, the eventual outcomes will be even worse.
Since the principal is unable to assess the project outcomes at the end of the first stage, the decision as to whether to continue the project in the second stage is made by the manager. The manager's decision on whether to execute the second stage of the project is based on the utility that the second stage of the project represents. The manager executes the second stage of the project under environment conditions b 2
and with effort e , maximizing the project’s utility. 2
) , ( )) ( 1 ( ) , ( ) ( ) ( ) 1 , ( max 2 * 2 2 2 2 2 2 2 2 b e L b b e G b e e rI UNV e (9)
Where (b2)is the probability that the project is successful, [0,1]1(b2) indicates that the project is a failure, 12 and (0)0, 0
2
b
. The manager’s utility function for the first order condition is:
0 )) ( 1 ( ) ( / 2 2 2 2 2 2 2 e e NV L b G b e de dU (10) Obtaining: ( ) (1 ( )) )/ ( ˆ 2 2 2 2 * 2 b Ge b Le e (11) From Eq. (11) we can find that the manager’s expected marginal utility when the project is successful is higher is that the expected marginal loss when the project is unsuccessful, meaning
2
2 (1 ( ))
)
(b2 Ge b2 Le
. When environment conditions are
2
b , the manager will devote a positive effort to execute the second stage of the project
0 ˆ*
2
e .
Proposition 2:
When the principal is not willing and/or is unable to assess the proposal, regardless of the environment conditions, the manager will execute the second stage of the project. The worse the environment conditions, the greater the effort devoted by the manager.
12 In order to analyze commitment escalation by manager when executing projects and simplify the
analytical process, the present study assumes that after the manager has put in the optimal effort, the success or failure of the project is determined by the environment conditions, while effort determines the manager’s utility or loss.
