Monitoring Technical Agents: Theory, Evidence, and Prescriptions

Agency relationships—where one party (the principal) delegates authority to another (the agent)—are well studied in financial settings but less so in technical settings. The asymmetry of information between the general manager and the technical manager is likely to create the possibility of misdirected effort, an overuse of the agent’s human capital, whether the agent is opportunistic or not. Analyzing a dataset of information technology hardware and staff spending by larger multidivisional firms during a growth phase of US IT spending, 1989−1993, results suggest that technical managers significantly overspent on hardware, with deleterious consequences for performance. Chief executive experience significantly altered the effects of overspending. Analysis of the results suggest a solution, a model termed “staged commitment,” that can be used to monitor technical agents in many areas of business. Thanks to Sanjeev Dewan, Joe Mahoney, Yasemin Kor, and seminar participants at Illinois and Southern Management for helpful comments and suggestions. Remaining errors are mine alone. Published: 2009 URL: http://www.business.uiuc.edu/Working_Papers/papers/09−0103.pdf Monitoring Technical Agents: Theory, Evidence, and Prescriptions Steven C. Michael Department of Business Administration 350 Commerce West 1206 South Sixth Street Champaign, IL 61820 (217) 265-0702 internet: [email protected] Date: 22 September 2008 Abstract Agency relationships—where one party (the principal) delegates authority to another (the agent)—are well studied in financial settings but less so in technical settings. The asymmetry of information between the general manager and the technical manager is likely to create the possibility of misdirected effort, an overuse of the agent’s human capital, whether the agent is opportunistic or not. Analyzing a dataset of information technology hardware and staff spending by larger multidivisional firms during a growth phase of US IT spending, 1989-1993, results suggest that technical managers significantly overspent on hardware, with deleterious consequences for performance. Chief executive experience significantly altered the effects of overspending. Analysis of the results suggest a solution, a model termed “staged commitment,” that can be used to monitor technical agents in many areas of business. Thanks to Sanjeev Dewan, Joe Mahoney, Yasemin Kor, and seminar participants at Illinois and Southern Management for helpful comments and suggestions. Remaining errors are mine alone.