Delegating the decision-making authority to terminate a sequential project

Abstract

This paper considers a two-stage project which requires investments to be made by different agents, who have career concerns, at each stage. The principal needs to decide whether the project should be continued or not after the first-stage outcome is realized. The principal can either keep the decision-making authority regarding the termination policy, or else delegate it to one of the agents. With career concerns, the first-stage agent always wants to continue the project, in which case the sunk cost fallacy occurs. On the contrary, the second-stage agent may prefer to stop it voluntarily to protect his reputation. Therefore, when the career concerns are strong, the principal should delegate the authority to the second-stage agent if an early termination of the project is also the best policy for the principal; while if the career concerns are weak, the principal should keep the authority.