Abstract:
In this experimental investigation, we explore the impact of justification on project choices. Introducing a novel element, we implement asymmetric payoff schemes commonly employed in business, signifying distinct payoff distributions for the firm (principal) and the manager (agent). The agent has to choose one project from two options that differ in their risk-return profiles. The outcomes of our experiment substantiate our hypothesis, indicating that a mandate for justification decreases the probability of agents selecting the project with higher risk and return. The degree of this reduction appears to hinge on the nature of justification. Increased profit shares for the agent or a project recommendation from the principal can partially counterbalance the distortion in the project choice.
