Abstract
We develop a theoretical framework to investigate the effect of information asymmetry between the two principals on the common agent’s incentives to provide an effort. We find that the agent’s effort to the poorly-informed (PI) principal is optimal, while his effort to the well-informed (WI) principal is not. Given that the valuable resource, i.e., the agent’s effort, should flow into the person who has higher ability, our results imply that the asymmetric information between two principals generates an efficiency loss within the organization. In addition, we examine whether this inefficiency is attenuated by changes of the relative weight of the agent’s profit set to each principal. The result shows that unless the WI principal solely determines the agent’s profit, the efficiency loss within the organization does not disappear. This finding corroborates that as long as the PI principal exists within the organization, the inefficiency might be inevitable. Our research not only provides new insights to the agency literatures but also offers useful information regarding the efficiency of organizational structure.
Highlights
Organizations are characterized by various structures they possess
We theoretically examine the effect of information asymmetry between the two principals on the common agent’s incentives to provide an effort
We demonstrate that while the agent puts on optimal amount of effort for the poorly informed (PI) principal, she does not provide an optimal level of effort for the well informed (WI) principal
Summary
Organizations are characterized by various structures they possess. Among those, the matrix structure has been regarded as the primary organizational device for maintaining an efficient allocation of resources in multi-project environments [1]. We expand the first research question by supposing that the relative weight of the agent’s profit set to each principal varies We address these issues by analyzing how the asymmetric information among the principals affects the agent’s incentives to provide an effort. Note that the question of how the asymmetric information between the two principals affects the agent’s incentives to provide an effort relies heavily on the Sustainability 2019, 11, 6920 premise that both the principals have an authority to direct the agent This implies that if the relative weight conferred to each principal varies, the influence of each principal on the agent’s behavior varies. We show that the interactive effects between the relative weight and asymmetric information do influence the common agent’s incentives to provide an effort This result is, to the best of our knowledge, new and may offer an additional insight to the agency literatures.
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