On the robustness of coordination mechanisms for investment decisions involving ‘incompetent’ agents

Abstract

In this paper we transfer the concept of the competitive hurdle rate (CHR).mechanism introduced by Baldenius et al. (Account Rev 82(4):837–867, 2007).into an agent-based model, and test its robustness with respect to an occurrence.of errors in forecasting. We find that our CHR born mechanism is most robust for.highly diversified investment alternatives and a limited amount of those projects.in need of scarce financial support. For misforecasting both the cash flow time.series and the managers’ individual efficiencies of operating investment projects,.we find that this result reverses with an increasing extent of being wrong, so that a.lower level of project heterogeneity appears to be more advantageous than a highly.diversified investment landscape, i.e., if managers are really, really wrong about.future economic development, the company fares better (or less worse, to be precise).if the investment alternatives are less dissimilar. This investigation allows to quantify.the extent of error, when this comes about. Moreover, we provide policy advice for.how an organization could design the framework of the CHR born mechanism so.that forecasting errors, which inevitably occur, bring only minimal damage to the.company.