Expectations or rational expectations? A theory of systematic goal deviation

Abstract

A planner uses goals to manage a preference disagreement over effort provision with a doer. Goals set output expectations for the doer which affect her behavior due to reference-dependent, loss-averse preferences over output. We characterize the planner's optimal goal and explore when it is aspirational versus achievable. Specifically, we show that the optimal goal is achieved by the doer only if the extent of preference disagreement is relatively small. Instead, when the extent of preference disagreement is large, the doer falls short of the optimal goal. The stochasticity of output plays an important role in generating this prediction within our model.