Limitations on the Use of Information Revealing Incentive Schemes in Economic Organizations
Hierarchical organizations often use formal information channels to facilitate communication between center and subordinate units. Unfortunately subgoal pursuit may lead subordinates to be dishonest when responding to information requests. One way to overcome this problem is to design incentive schemes that encourage honesty. While incentive schemes that successfully encourage accurate information revelation exist for certain environments, this will not always be the case. In particular, if managerial effort is considered or if the center's objective is defined net of bonuses there may not exist any incentive scheme leading simultaneously to honest reporting and to maximization of the center's objective function.