Abstract
We study investment decisions in organizations with private information in a principal-agent hierarchy. We show how investment decisions can be improved when the principal engages in two-sided money burning through the wasteful involvement in meetings and other procedures even if this is costly for the principal. In fact when this is more costly for the agent, the principal is willing to impose wasteful procedures as it constitutes a credible signal of the value of the investment. We show that this phenomenon of wasteful procedures will be used more in the optimal mechanism when costs of doing so are higher for the agent than for the principal.
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