Salience and management‐by‐exception

Abstract

This paper studies a firm's organisational responses if its agents misevaluate information. If a manager overreacts to unusual events, it may be desirable for the firm to adopt the management practice management-by-exception. I develop a theoretical framework to study this technique and derive conditions under parsimonious assumptions for when it should be adopted. Moreover, I show how further assumptions can refine the model's predictions, establishing a direct link between the manager's over-responsiveness and organisational rigidity. The strategy is implemented by controlling the information that the manager receives.