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Honest

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Submitted By brittany0916
Words 389
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What did the scholars do?
The scholars did research on the aggregate contract and individual contract evaluation. The model they used is based on risk-neutral principal and agent. There is no income for agent, but he/she can derive income from the slack contract, which is the reported cost minus the real cost. Contract setting is based on Hurdle contract. Principal will set the hurdle at c+σ for slack contract, no matter what agent reports, if the price is below c+σ, principal will pay c+σ; while principal also set c-σ for the rationing contract.

What did they find?
Individual project model:
Project 1 project 2
|0.5 |0.5 |
|+σ |-σ |

|0.5 |0.5 |
|+σ |-σ |

Two projects Model:
|0.25 |0.25 |
|+σ ; +σ |-σ ; +σ |
|+σ ; -σ |-σ ; -σ |

They found that under intermediate level of profitability and slack potential, the aggregation contract is preferred and the advantage is maximized.
They also found that it is better to bundle projects with negatively correlated profitability when principal choose the aggregation evaluation.
If the projects are positively correlated, aggregation evaluation could still be beneficial as long as the correlation is small enough.

What does it mean?
One of the aggregation advantages is to reduce the managerial costs of the principal. As now you treated multiple projects as one, related costs and time will relatively less for a combined project compared to the sum of the individual cost.
When the principal faces the greatest conflict between reducing organizational slack and maintaining profitable production, it is

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