Information and Incentive Mechanisms for Aligning Principal and Agent Interestsin Escalation Situations

摘要

The selection and management of new products are important issues due to thelarge capital investments required to bring a new product on-line. A major problem is a tendency for managers to become overly committed to a new product even when costs have been suffered which indicate the product is not economical for the firm. In recent literature, this problem has been called 'escalation to commitment to a failing course of action' or simply 'escalation'. Escalation appears to be a common problem in several types of investment decisions. When producing new products, for example, a series of investments over several years is often required during which time production levels are increased incrementally towards full production. Managers may decide at several decision points to continue with an uneconomical product rather than terminate production.