empirical evidence on the relation between stock option compensation and risk taking abstract we examine whether executive stock options esos provide managers with incentives to invest in risky projects for a sample of oil and gas producers we examine whether the coefficient of variation of future cash flows from exploration activity our proxy for exploration risk increases with the sensitivity of the value of the ceo s options to stock return volatility eso risk incentives both eso risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach we find evidence that eso risk incentives has a positive relation with future exploration risk taking additional tests indicate that eso risk incentives exhibits a negative relation with oil price hedging in a system of equations where eso risk incentives and hedging are allowed to be endogenously determined overall our results are consistent with esos providing managers with incentives to mitigate risk related incentive problems

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

incentives for information production and optimal job assignment with human capital considerations in this paper we examine the problem of inducing a manager to acquire information which is useful in determining his optimal job assignment but which might also adversely affect his market value we show that spot contracts are optimal and generate the first best effort level when the manager is risk neutral when the manager is risk averse the optimal contact consists either of a partial insurance contract against downward revisions in compensation or a competitive spot contract depending upon the nature of prior information

delegating the decision making authority to terminate a sequential project abstract this paper considers a two stage project which requires investments to be made by different agents who have career concerns at each stage the principal needs to decide whether the project should be continued or not after the first stage outcome is realized the principal can either keep the decision making authority regarding the termination policy or else delegate it to one of the agents with career concerns the first stage agent always wants to continue the project in which case the sunk cost fallacy occurs on the contrary the second stage agent may prefer to stop it voluntarily to protect his reputation therefore when the career concerns are strong the principal should delegate the authority to the second stage agent if an early termination of the project is also the best policy for the principal while if the career concerns are weak the principal should keep the authority

tax preferred savings accounts and marginal tax rates evidence on rrsp participation the effect of taxes on participation in registered retirement savings plans between 1982 and 1996 is studied interprovincial changes in the tax structure over this period provide identifying variation using this variation i find that taxes influence households participation decisions but more weakly than previously estimated a 10 percentage point increase in the marginal tax rate is estimated to increase the probability of participation by 8 per cent this explains only 5 1 per cent of the trend in participation i also find suggestive evidence that the carryforward mechanism may be used as an instrument for tax base smoothing jel classification h24 comptes d epargne fiscalement privilegies et taux marginaux d imposition resultats sur la participation aux regimes enregistres d epargne retraite reer ce memoire etudie les effets du regime d imposition sur la participation aux regimes enregistres d epargne retraite reer entre 1982 et 1996 les changements dans la structure d imposition d une province a l autre au cours de la periode fournissent un eventail de possibilites utilisant cet eventail l auteur decouvre que le regime fiscal influence les decisions de participer des menages mais plus faiblement qu on l avait estime precedemment un accroissement de 10 pour cent dans le taux marginal d imposition accroit la probabilite de participation de 8 pour cent voila qui explique seulement 5 1 pour cent de la tendance dans la participation l auteur decouvre aussi que le mecanisme de report dans le temps de la portion inutilisee de la contribution aux reer peut etre utilise comme instrument de lissage de la base de revenus imposables

escalation errors and the sunk cost effect an explanation based on reputation and information asymmetries this paper is concerned with explaining a paradox of human behavior consider the following example a department manager makes a large investment in new production equipment and soon after learns of different equipment that could perform the same operations at lower cost incremental analysis favors switching but the manager refuses saying he does not want to waste the investment already made such real world examples have been extensively documented and studied by social scientists see thaler 1980 and staw 1981 in these examples the decision maker having commited to a course of action subsequently discovers new information that indicates that continuing the earlier commitment would likely result in worse consequences than switching in spite of this he clings to and even escalates his earlier

do sunk costs matter let bygones be bygones khieu samphan former head of state of the khmer rouge government asking cambodians to forget the more than one million people who died under his government s rule i introduction sunk costs are costs that have already been incurred and cannot be recovered sunk costs do not change regardless of which action is presently chosen therefore an individual should ignore sunk costs to make a rational choice introductory textbooks in economics present this as a basic principle of rational decision making frank and bernanke 2006 10 mankiw 2004 297 nonetheless people are apparently often influenced by sunk costs in their decision making once individuals have made a large sunk investment they have a tendency to invest more in an attempt to prevent their previous investment from being wasted the greater the size of their sunk investment the more they tend to invest further even when the return on additional investment does not seem worthwhile for example some people remain in failing relationships because they have already invested too much to leave others buy expensive gym memberships to commit themselves to exercising still others are swayed by arguments that a war must continue because lives will have been sacrificed in vain unless victory is achieved these types of behavior do not seem to accord with rational choice theory and are often classified as behavioral errors people who commit them are said to be engaging in the sunk cost fallacy students are repeatedly taught in economic classes that sunk costs are irrelevant to decision making so that they may ultimately learn to make better decisions invoking the theory as a normative prescription conditioning on the level of sunk costs is also taken as evidence that people do not always make rational choices thaler 1991 suggesting that the explanatory power of rational choice theory is limited in this article we argue that in a broad range of environments reacting to sunk costs is actually rational agents may rationally react to sunk costs because of informational content reputational concerns or financial and time constraints a informational content consider a project that may take an unknown expenditure to complete the failure to complete the project with a given amount of investment is informative about the expected amount needed to complete it therefore the expected additional investment required for fruition will be correlated with the sunk investment moreover in a world of random returns the realization of a return is informative about the expected value of continuing a project a large loss which leads to a rational inference of a high variance will often lead to a higher option value because option values tend to rise with variance consequently the informativeness of sunk investments is amplified by consideration of the option value b reputational concerns in team relationships each participant s willingness to invest depends on the investments of others in such circumstances a commitment to finishing projects even when they appear ex post unprofitable is valuable because such a commitment induces more efficient ex ante investment thus a reputation for throwing good money after bad the classic sunk cost fallacy can solve a coordination problem in contrast to the desire for commitment people might rationally want to conceal bad choices to appear more talented which may lead them to make further investments hoping to conceal their investments gone bad c financial and time constraints given financial constraints larger past expenditures leave less ability to make future expenditures ceteris paribus thus financial constraints may lead companies or individuals to stick with projects that no longer appear to be the best choice moreover given limited time to invest in projects as the time remaining shrinks individuals have less time over which to amortize their costs of experimenting with new projects and therefore may be rationally less likely to abandon current projects

estimating the effects of unions on wage inequality in a panel data model with comparative advantage and nonrandom selection this article considers the estimation of the structure of wages in union and nonunion sectors it proposes an estimator that extends standard panel data techniques to the case in which the return to the permanent component of the error term is differently rewarded in the two sectors the econometric model is used to estimate the effect of unions on both the level and the variance of wages in canada the findings indicate that unions increase the average wage of workers and compress the returns to observable measures of skill and to a time invariant unobservable measure of skill

the role of information asymmetry in escalation phenomena empirical evidence abstract economic rationality dictates that only incremental costs and benefits should affect decisions observed behavior often seems to violate this principle resulting in unwarranted commitment to past choices and their escalation in this paper we present experimental results that show that information asymmetry plays a key role in determining when such escalation behavior occurs this finding opens new avenues for mitigating escalation behavior since information asymmetry is an environmental feature that can be modified by organization design and explicit economic rewards

why are bad products so hard to kill it is puzzling that firms often continue to invest in product development projects when they should know that demand will be low we argue that bad products are hard to kill because firms face an inherent conflict when designing managers incentives rewarding success encourages managers to forge ahead even when demand is low to avoid investing in low demand products the firm must also reward decisions to kill products however rewarding managers for killing products effectively undermines the rewards for success the inability to resolve this tension forces the firm to choose between paying an even larger bonus for success and accepting continued investment in low demand products we explore the boundaries of this argument by analyzing how the timing of demand information affects product investment decisions

a theory of conservatism a free rider problem arises when a group choice between two alternatives has to be made on the basis of privately collected evidence leading to insufficient effort in gathering evidence and an ex ante welfare loss for the group to alleviate the free rider problem the group can commit to a conservative rule whereby the decision is made against the alternative favored by the group s preference or prior when evidence supports it but is not preponderant optimal conservatism increases private incentives to gather evidence and improves the quality of the group decision my result explains why sometimes groups appear overly cautious toward favored alternatives

project escalation and sunk costs a test of the international generalizability of agency and prospect theories previous north american research suggests that aspects of agency theory and prospect theory may explain decisions to escalate commitment to failing projects this study explores the universality of these theories in this context the willingness of north american and asian managers to escalate commitment to losing projects was measured using four go no go decision cases we hypothesized that asian managers would be less willing to act in their self interest a lower agency effect and would be more willing to escalate a decision in the face of negative framing a stronger framing effect we found that agency theory had strong explanatory power for project in our asian sample framing effects were significant in both but they were not significantly different

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

marginal tax rates and tax favoured pension savings of the self employed evidence from sweden in recent years the study of how individuals respond to policies that aim at promoting pension savings has emerged as a vital area of economic research this paper adds to this body of literature by estimating the tax price elasticity of contributions to tax favoured pension savings accounts on a population of self employed individuals i exploit a unique total database over the swedish population that covers the years 19992005 using instrumental variables i obtain a tax price elasticity estimate of 0 51 and an income elasticity estimate of 0 13 whereas ordinary least squares ols produces estimates that conflict with consumer theory

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

the effect of unions on the structure of wages a longitudinal analysis this paper studies the effects of unions on the structure of wages using an estimation technique that explicitly accounts for misclassification errors in reported union status and potential correlations between union status and unobserved productivity the econometric model is estimated separately for five skill groups using a large panel data set formed from the u s current population survey the results suggest that unions raise wages more for workers with lower levels of observed skills in addition the patterns of selection bias differ by skill group among workers with lower levels of observed skill unionized workers are positively selected whereas union workers are negatively selected from among those with higher levels of observed skill despite a large and sophisticated literature there is still substantial disagreement over the extent to which differences in the structure of wages between union and nonunion workers represent an effect of trade unions rather than a consequence of the nonrandom selection of unionized workers over the past decade several alternative approaches have been developed to control for unobserved heterogeneity between union and nonunion workers 2 one method that has been successfully applied in other areas of applied microeconometrics is the use of longitudinal data to measure the wage gains or losses of workers who change union status unfortunately longitudinal estimators are highly sensitive to measurement error even a small fraction of misclassified union status changes can lead to significant biases if the true rate of mobility between union and nonunion jobs is low this sensitivity led lewis 1986 to essentially dismiss the longitudinal evidence in his landmark survey of union wage effects in this paper i present some new evidence on the union wage effect based on a longitudinal estimator that explicitly accounts for misclassification errors in reported union status the estimator uses external information on union status misclassification rates along with the reduced form coefficients from a multi variate regression of wages on the observed sequence of union status indicators to isolate the causal effect of unions from any selection biases introduced by a correlation between union status and the permanent component of unobserved wage heterogeneity recognizing that unions may raise wages more or less for

from theory to practice canadian economists contributions to public finance we survey canadian economists contributions to the field of public finance from the mid 1980s to 2016 we highlight the development and extension of the models and tools of public economics and the empirical studies that have deepened our understanding of the efficiency and distributional issues over a wide range of public finance issues we also highlight contributions to the development of policies through commissioned reports and the important role that canadian institutions the canadian tax foundation the think tanks and the federal and provincial departments of finance have played in shaping tax and fiscal policies de la theorie a la pratique contributions des economistes canadiens a la finance publique on examine les contributions des economistes canadiens au domaine de la finance publique du milieu des annees 1980 a 2016 on souligne le developpement et l extension des modeles et des outils d economie publique et les etudes empiriques qui ont aide a approfondir notre comprehension des enjeux d efficacite et de distribution dans un vaste eventail de questions de finance publique on souligne aussi les contributions des rapports commandites au developpement de politiques publiques ainsi que le role important d institutions canadiennes l association canadienne d etudes fiscales les groupes d experts ainsi que les ministeres des finances du gouvernement federal et des gouvernements provinciaux dans le design des politiques fiscales

market exit through divestment the effect of accounting bias on competition we analyze the effect of accounting bias on the competition and market structure of an industry in our model firms interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system we find that this bias strictly decreases firms profits when investors do not have an abandonment option but different results emerge when we allow the investors to divest in the interim specifically a conservative accounting regime may increase the likelihood of projects being discontinued inducing some firms to exit from the product market and leaving rivals to capture their market share a conservative regime can thus soften market competition and result in ex ante higher investment payoff higher consumer surplus and higher total social welfare since industries often have common reporting standards we also identify the degrees of industry wide accounting bias that maximize the expected investor payoffs finally we allow for investors to coordinate their divestment

multistage capital budgeting with delayed consumption of slack capital budgeting frequently involves multiple stages at which firms can continue or abandon ongoing projects in this paper we study a project requiring two stages of investment failure to fund stage 1 of the investment precludes investment in stage 2 whereas failure to fund stage 2 results in early termination in contrast to the existing literature we assume that the firm can limit the manager s informational rents with the early termination of the project in this setting we find that the firm optimally commits to a capital allocation scheme whereby it forgoes positive net present value npv projects at stage 1 capital rationing whereas at stage 2 depending on the manager s previous report it sometimes implements projects with a negative continuation npv but in other situations forgoes implementing projects with positive continuation npvs this paper was accepted by mary barth accounting

renewable energy policy framework and bioenergy contribution in the european union an overview from national renewable energy action plans and progress reports abstract the use of renewable energy is projected to increase substantially in the european union to reach a share of 20 in final energy consumption and 10 renewable energy in transport by 2020 the renewable energy contribution is further expected to increase to 55 75 of gross final energy consumption in 2050 according to the latest reports the european union has made significant progress since 2005 and is on track to reach its 2020 renewable energy targets this paper provides a review of the policy framework for renewable energy in the european union and an analysis of the progress made by the use of renewable energy as well as the expected developments until 2020 and beyond it focusses on the contribution of bioenergy the major source among renewables in the european union as biomass availability is a critical issue for the bioenergy production this paper provides an analysis of the biomass demand for reaching the 2020 targets in relation with the expected domestic supply and biomass potential

the use of management control mechanisms to mitigate moral hazard in the decision to outsource using archival data from the u s passenger airline industry this study examines whether management control mechanisms aimed at mitigating moral hazard explain outsourcing decisions over and above transaction cost economics tce determinants documented in prior research consistent with tce theory we find that in house production efficiencies and our proxy for transaction risk i e deriving from transaction infrequency transaction complexity and relationship specific investments significantly explain the extent of outsourcing of aircraft maintenance we extend tce insights to show that incentive delta i e the sensitivity of ceo portfolio holdings to stock price changes strengthens the negative association between production efficiencies and outsourcing while incentive vega i e the sensitivity of ceo holdings to stock return volatility weakens the negative association between transaction risk and outsourcing monitoring strengthens the negative association between in house production efficiencies and outsourcing but has no effect on the transaction risk outsourcing relation the results suggest that the use of outsourcing to achieve cost savings is promoted through both incentive contracts and monitoring but outsourcing to achieve the desired risk level is promoted only through incentive contracts

insider trading and the valuation of international strategic alliances in emerging stock markets because stock markets in emerging economies are relatively new under regulated and often segmented investors responses to public announcements by firms in these economies may differ from responses in developed economies stock markets we draw on the institutional and corporate governance literatures to explain investor reactions to announcements of international strategic alliances isas between foreign and emerging market firms we argue that emerging economies stock markets positively value isas however information leakages due to weak regulatory environments siphon off the good news before the isa announcement date the level of state ownership of publicly traded firms and the nationality of foreign partners both affect the size and timing of market reactions

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

turnover in top management and de escalation of commitment we explore how de escalation of commitment is linked to top management turnover and economic changes at the firm escalation of commitment occurs when managers continue investment in a project afte

beating irrationality does delegating to it alleviate the sunk cost effect we investigate the impact of delegating decision making to information technology it on an important human decision bias the sunk cost effect to address our research question we use a unique data set containing actual market transaction data for approximately 7 000 pay per bid auctions in contrast with the laboratory experiments of previous related studies our research presents the unique advantage of investigating the effects of it enabled automated bidding agents on the occurrence of a decision bias in real market transactions we identify normatively irrational decision scenarios and analyze consumer behavior in these situations our findings show that participants with a higher behavioral investment are more likely to violate the assumption of normative economic rationality because of the sunk cost effect more importantly we observe that the delegation of auction participation i e actual bidding to it significantly reduces the occurrence of the sunk cost effect in subsequent decisions made by the same individual we can attribute this reduction to the comparably lower behavioral investments incurred by auction participants who delegate their bidding to it in particular by mitigating different contributors of behavioral investments delegating to it reduces the likelihood of the occurrence of the sunk cost effect by more than 50 this paper was accepted by sandra slaughter information systems

work hard not smart stock options in executive compensation abstract this paper examines the optimal equity compensation for executives when executives choose a level of effort to devote to gathering information and a criterion for acting on the information gathered the optimal exercise price involves a trade off a higher exercise price moves the executive s decision criterion away from first best but provides leverage that moves the executive s effort toward first best this trade off depends on a variety of factors including the potential influence of decisions on firm value we document empirical regularities consistent with the theory such as that options are relatively less prevalent in the equity compensation of more senior executives

overconfidence compensation contracts and capital budgeting a risk averse manager s overconfidence makes him less conservative as a result it is cheaper for firms to motivate him to pursue valuable risky projects when compensation endogenously adjusts to reflect outside opportunities moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects still too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

using the capital market as a monitor corporate spinoffs in an agency framework a model is developed in which corporate spinoffs are a feature of incentive contracts for product managers in diversified firms i argue that the possibility of a future spinoff can improve current incentives for divisional managers even if a spinoff rarely actually occurs spinoff incentive policies exploit the fact that after a spinoff the stock value of the product line is a much cleaner signal of managerial productivity than when the division belongs to the parent firm i show that providing current incentives through such a reorganization policy can dominate standard principal agent contracts in highly diversified firms empirical implications of the model are developed regarding corporate spinoff behavior and the compensation of divisional managers

the evolutionary logic of honoring sunk costs i introduction economists claim that sunk costs should not figure in current decision making because by definition these expenditures cannot be retrieved and should be treated as bygones but there is a large literature both experimental and anecdotal in which people are observed to waste resources by honoring bygones that could not possibly make them better off see e g arkes and blumer 1985 arkes and ayton 1999 mcafee mialon and mialon 2010 thaler 1980 such excess in wasting resources is unlikely to have been tolerated by nature in the process of evolution if it did not serve some purpose to enhance fitness in our remote past the purpose of this study is to suggest such a function whereby evolutionary processes have hardwired a concern for sunk costs in human decision making 1 the concept of honoring sunk costs has been referred to in the literature as the concorde fallacy 2 arkes and blumer 1985 have a number of other examples of good money being thrown after bad economists have provided various explanations for why sunk costs appear salient to humans kanodia bushman and dickhaut 1989 and prendergast and stole 1996 propose a theory where reputational effects make agents unwilling to change their decisions mcafee mialon and mialon 2010 have suggested several models involving information content reputation or constraints on decision making that provide rational reasons for taking sunk costs into account likewise baliga and ely 2011 have proposed a model in which sunk costs may acquire salience as a memory kludge because they may contain information about the value of a project previously initiated but whose value has now been forgotten carmichael and macleod 2003 have proposed a model where in a bilateral bargaining situation the norm of taking account of sunk costs resolves the hold up problem that typically results in underinvestment thaler 1980 arkes and blumer 1985 and whyte 1986 suggested a prospect theory approach to understanding sunk cost effects arkes and blumer 1985 the philosopher nozick 1993 and others have argued that honoring sunk costs can alleviate problems of time inconsistency and temptation john may believe that going to the theater is a good thing but when the time comes he cannot rouse himself to do so because it would require relinquishing whatever else appears appealing at the time to circumvent this john buys tickets in advance as a precommitment device but to do this he must believe in the first place that his future self is going to honor sunk costs 3 whatever the reason for the time inconsistent preferences say hyperbolic discounting the honoring of sunk costs may be used to remedy the problem of time inconsistency but nozick for example offers no reason for why sunk costs are honored in the first place we offer an evolutionary reason to suggest why nature may have hardwired a proclivity in humans to honor sunks costs a reason that differs from those offered in the articles cited above we propose that the built in salience of sunk costs is an adaptation to the problem of self control self control problems may arise in decision making because contrary to our untutored perceptions the human brain has a triune 4 rather than a unitary structure maclean 1989 panksepp 1998 because of the way the brain has evolved different regions within it defined by their own neuroanatomical and neurochemical features deal with different aspects of action and behavior although interconnected through chemical and neuronal pathways the different control centers tend to act autonomously and may conflict in their responses to stimuli when the emotional or motivational centers which lie in the sub cortical limbic system push us to certain actions that the rational persona in the cortex wishes to deny there is a conflict and the problem of self control arises panksepp 1998 301 notes

project evaluation and control in decentralized firms is capital rationing always optimal when capital investments are made in an agency setting we show that even without risk considerations capital rationing need not be the only rational outcome we analyze a principal agent model with risk neutrality and with two productive inputs the agent s efforts and capital investment the two inputs can be either economic complements or substitutes the agent has pre contract private information about his own type the output is measured with an additive noise we show that when the two inputs are substitutes the optimal solution entails a marginal capital rationing but when the two inputs are complements then either a marginal capital rationing or a marginal leniency could be the optimal response our results therefore provide an explanation for why firms may employ a capital rationing for a project that may increase manufacturing complexity and hence may reduce managerial labor productivity yet employ a less strict criterion for evaluating a productivity enhancing project this result contrasts with earlier results where only a capital rationing is shown to be optimal

why hang on to losers divestitures and takeovers we study the divestiture decisions of managers who care about their reputations managers divestiture and investment decisions are publicly observable but managers privately observe signals with respect to the future payoff distribution of investments they have initiated we establish that in equilibrium there is too little divestiture these inefficiencies create the opportunity for wealth enhancing divestiture motivated takeovers a key result is that only managers of targets with middle of the road asset specificity should consider the takeover threat credible these findings suggest that uniqueness of assets is an important determinant of both agency costs and takeover activity our analysis leads to several empirical predictions overwhelming empirical evidence has documented large gains in shareholder wealth that arise from takeovers jarrell brickley and netter 1988 and jensen and ruback 1983 the source of these gains has remained elusive however although takeovers are followed by some infusion of new managerial talent we have not witnessed the kind of profound post takeover restructuring of the productive activities of target firms that would readily justify the documented wealth gains a commonly observed post takeover initiative is divestiture of some of the target s lines of business bhide 1989 and bhagat shleifer and vishny 1990 what is puzzling is that if the gains from takeovers stem from the anticipation of such divestitures then why were these divestitures not undertaken by the target firm s management in the first place the purpose of this paper is to provide a possible answer to this question our focus is on the divergence in incentives between managers and shareholders with respect to divestitures of ongoing projects we show that managers might rationally decide to hang on to projects that should be divested in

the retirement incentive effects of canada s income security programs canada has a large income security system for retirement that provides significant and widely varying disincentives to work at older ages we provide an empirical analysis of the retirement incentives of the canadian income security system using a new administrative database we find that the work disincentives inherent in the canadian income security system have significant impacts on retirement this suggests that program reform can play a role in responses to fiscal pressures we also demonstrate the importance of controlling for lifetime earnings in retirement models specifications without these controls overestimate the effects of the income security

reputation concerned policy makers and institutional status quo bias abstract we study the policy choice of an office holding politician who is concerned with the public s perception of his capabilities the politician decides whether to maintain the status quo or to conduct a risky reform the reform s success depends critically on the politician s capabilities which are privately known to the politician the public observes both his policy choice and the outcome of the reform and assesses his competence we show that the politician may engage in socially detrimental reform in order to be perceived as more capable we investigate the institutional remedy that balances the gains and costs when the policy maker is subject to reputation concerns conservative institutions that thwart beneficial reform may potentially improve social welfare

bank acquisitions and ownership structure theory and evidence abstract in this paper we both theoretically and empirically consider the joint nature of two ownermanager conflict resolution mechanisms insider shareholdings and shareholder concentration we find evidence of a significant entrenchment effect for high low firms moreover bidder returns are found to be positive for high high firms only we utilize a switching of regression regimes model to solve for critical values of and that subdivide the universe of acquiring firms into separate and distinct ownership structure regimes i e that define high vs low levels of or

the strategic implications of sunk costs a behavioral perspective abstract this paper examines some of the strategic implications of the sunk cost phenomenon in sequential allocation decisions drawing from psychology and behavioral decision theory we first present a taxonomy of possible causes for the sunk cost effect the tendency of many managers to throw good money after bad we then present the analysis of some implications of this behavior in strategic situations a two period strategic game is developed and analyzed to derive optimal allocations as a function of one player s sunk cost behavior we establish when this behavior can be used as a successful precommitment strategy by the sunk cost player and when it is exploitable by an opponent welfare implications are also explored the sunk cost effect constitutes a form of strategic preference manipulation in which a credible preference change can be induced to provide a strategic advantage to one of the players

career concerns incentives and endogenous learning in labour markets models of career concerns provide a framework for analyzing the actions that may be taken by a manager in an attempt to influence performance signals that the market uses to update its beliefs on her productivity and the incentive problem that arises if such actions do not coincide with those that maximize the financial return to a firm s owner this survey provides a formal introduction to the main types of models of career concerns hidden action and hidden information and discusses some extensions of these models applications of the career concerns framework to explain aspects of managerial behavior and the form of labor market institutions are emphasized copyright 1992 by blackwell publishers ltd

capital budgeting and delegation abstract as part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it in our model delegation is a way to save on costly investigation of proposed projects therefore it is more extensive the larger are the costs of such investigations this delegation takes advantage of the fact that the lower level manager s preferences are assumed to be similar though not identical to those of the higher level

the effects of incentive compensation contracts on the risk and return performance of commodity trading advisors this paper shows that commodity trading advisors ctas investment performance may be partially explained by their incentive compensation contracts contracts include base incentive and asset parameters the relationships between contract parameters and performance are theoretically indeterminate but are examined here empirically results indicate that incentive parameters are positively related to return means and standard deviations the dollar amounts of assets ctas manage are negatively related to return means and standard deviations supporting elton et al s 1987 1989 finding that cta performance falls after public offerings of commodity funds intuitively since dollar fees are a function of assets at the higher asset and fee levels achieved through commodity fund offerings ctas may safeguard assets and fees by pursuing less risky investment strategies

optimal contracts under adverse selection and moral hazard a continuous time approach this article presents a continuous time agency model in the presence of adverse selection and moral hazard with a risk averse agent and a risk neutral principal under the model setup we show that the optimal controls are constant over time and thus the optimal menu consists of contracts that are linear in the final outcome we also show that when a moral hazard problem adds to an adverse selection problem the monotonicity condition well known in the pure adverse selection literature needs to be modified to ensure the incentive compatibility for information revelation the model is applied to a few managerial compensation problems involving managerial project selection and capital budgeting decisions we argue that in the third best world the relationship between the volatility of the outcome and the sensitivity of the contract depends on interactions between the managerial cost and the firm s production functions contrary to conventional wisdom sometimes the higher the volatility the higher the sensitivity of the contract the firm receiving good news sometimes chooses safer projects or invests less than it does with bad news we also examine the effects of the observability of the volatility on corporate investment decisions copyright 2005 oxford university press

executive effort and selection of risky projects this article examines the incentives of executives to adopt risky projects the agency problem considered is that of motivating the executive to expend effort to generate information about the profitability of projects and to select the best project conditional upon the information that his effort generates we show that the executive and the principal will not always agree regarding which project is best we provide conditions under which this conflict of interest leads from the principal s perspective to either an underinvestment or an overinvestment in risky projects

on managerial contracting with asymmetric information abstract this paper deals with asymmetric information in a two period principal agent model where the agent makes investment decisions after observing a private signal we study the case where the current employer has more information than other prospect employers and the case where the private information is not verifiable by the current employer we analyze the effect of these asymmetries on the wage contracts as well as their interplay

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

an agency theory of the division of managerial labor should responsibility for strategic planning and execution be assigned to the same manager should a firm have a chief operating officer with responsibilities distinct from those of the chief executive officer how does the division of labor affect managerial opportunism this paper uses a formal agency theoretic model to address these questions and present a new theory of the division of managerial labor building on penrose s typology penrose e 2009 the theory of the growth of the firm 4th ed blackwell oxford uk the theory identifies when to assign i entrepreneurial services which relate to strategic planning and the acquisition of resources and ii managerial services which relate to execution to the same generalist manager rather than to different specialists the analysis reveals the critical importance of separability i e whether a supervisor can separately observe the outcomes of entrepreneurial and managerial services if managers and their supervisor have symmetric information about separability hiring a generalist dominates because managerial services which are easier to assess reduce the scope for opportunism associated with entrepreneurial services which are harder to assess conversely if managers have better information regarding separability and the probability of separability is low hiring specialists dominates because hiring a generalist allows the potential for opportunism associated with entrepreneurial services to contaminate the provision of managerial services even so the benefits of hiring a generalist may be restored if the services are sequenced appropriately an implication of such sequencing is that a firm will grow in fits and starts giving rise to a penrose effect even if labor market frictions do not impede the assimilation of new managers

resource allocation decisions under imperfect evaluation and organizational dynamics research and development r d projects face significant organizational challenges especially when the different units who run these projects compete among each other for resources in such cases information sharing among the different units is critical but it cannot be taken for granted instead individual units need to be incentivized to not only exert effort in evaluating their projects but also to truthfully reveal their findings the former requires an emphasis on individual performance whereas the latter relies on the existence of a common goal across the organization motivated by this commonly observed tension we address the following question how should a firm balance individual and shared incentives so that vital information is both acquired and equally importantly disseminated to the entire organization our model captures two key characteristics of r d experimentation information is imperfect and it is also costly our analysis yields several important implications for the design of such incentive schemes and the management of r d portfolios this paper was accepted by david hsu entrepreneurship and innovation

reputational concerns and managerial incentives in investment decisions abstract i consider managerial incentives in investment decisions in the model a manager obtains private signals on projects the informative contents of which depend on his ability i show that in spot market equilibria the manager concerned about his market reputation disregards informative signals in early periods of his career considering long term contracts to remedy such inefficiency i find that for a risk neutral manager wage guarantees may implement an efficient investment rule while for a risk averse manager the optimal contract must trade off investment efficiency for intertemporal consumption smoothing and risk sharing

managerial reputation and divisional sell offs a model and empirical test abstract this paper presents a reputation model of divestiture activity that yields a sharp cross sectional implication for event studies of sell off announcements a decision to divest a division that is known to be successful conveys good news about the division in contrast a decision to divest a division that is known for underperformance conveys no news about the division we test these hypotheses on a sample of sell off announcements for which we find stories in the wall street journal unambiguously characterizing the division being sold as either a winner or a loser the stock price reaction to the sell off of losers is indistinguishable from zero while the stock price reaction to the sell off of winners is a statistically significant 2 5 these results are strengthened when we expand the sample to include divisions whose profitability was announced in the company s annual report for this expanded sample the average stock price reaction to the announcements of sell offs of losers remains indistinguishable from zero while returns from the sell offs of winners average a highly significant 3 4

conservative accounting and equity valuation abstract this paper examines how conservative accounting affects the relation between accounting data and firm value the analysis shows that conservative accounting can be characterized equivalently in terms of book value earnings or book rate of return furthermore capitalized earnings generally provide a less biased estimate of equity value than book value does in addition firm growth affects the way earnings and book value are combined in valuation a weighted average of book value and capitalized earnings with the weight on earnings being an increasing and convex function of growth yields an asymptotically unbiased estimate of equity value when growth is positive the weight on book value is negative

job protection versus contracts at will trading off entrenchment and shirking i take an efficient contracting approach to answer the question how much job protection to offer employees in particular those at the top of organizations given their privileged information or formal authority senior managers who are not given such protection are likely to take opportunistic actions that make them less dispensable the optimal employment contract trades off the resulting inefficiencies that arise from such self made job security with the reduced incentives and higher compensation costs under explicit employment protection one implication of the model is that more senior managers such as ceos should receive both higher rents and more protection e g through contracts that are explicitly not at will or that specify a longer duration

new evidence on taxes and portfolio choice abstract identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates marginal tax rates vary with income but income surely affects portfolio choice directly in systems of individual taxation like canada s couples with the same household income can face different effective tax rates on capital income when labor income is distributed differently within households using this source of variation we find portfolio responses to taxation among more affluent households the estimated effects are statistically significant but economically modest in a placebo test using data from the u s which has joint taxation we find no effect of the intra household distribution of labor income on portfolios

crowd out education and employer contributions to workplace pensions evidence from canadian tax records this study assesses whether workplace pensions help individuals overcome knowledge barriers to saving for retirement using administrative data from canada and exploiting unique features of the pension system i find compelling evidence that each 1 contributed to workplace pensions partially crowds out other retirement saving by approximately 0 50 among interior savers in a regression kink design centering on unionized workers for methodological reasons further analysis indicates active versus passive decisions are influenced by education exploiting compulsory schooling reforms for identification i conclude by showing pension and education reform are both viable mechanisms for boosting saving from a life cycle perspective jel codes e21 h30 i21 j32

conflicts and common interests in committees committees improve decisions by pooling members independent information but promote manipulation obfuscation and exaggeration of private information when members have conflicting preferences committee decision procedures transform continuous data into ordered ranks through voting this coarsens the transmission of information but controls strategic manipulations and allows some degree of information sharing each member becomes more cautious in casting the crucial vote than when he alone makes the decision based on own information increased quality of one member s information results in his casting the crucial vote more often committees make better decisions for members than does delegation

on evaluation costs in strategic factor markets the implications for competition and organizational design this paper uses a formal model to study how evaluation costs affect competition for resources in strategic factor markets it finds that relative scarcity may not always benefit resource sellers rather when competition among resource investors passes a certain threshold intensity miscoordination among investors increases to the point that sellers expected profits decline this paper extends the model to consider how investors organize to overcome managerial agency in resource evaluation two organizational designs are considered a incentivization wherein a lower level manager is motivated by an incentive contract to evaluate resources for an investor and b supervision wherein evaluation is either handled directly or closely monitored by headquarters the model suggests that competition among investors will be associated with a greater use of supervision and that investors using supervision will tend to make lower offers this paper also finds that supervision will be more common when valuable resources are rare this paper was accepted by bruno cassiman business strategy

moral hazard in corporate investment and the disciplinary role of voluntary capital rationing this paper compares three capital budgeting rules the npv rule a high hurdle rate and capital rationing and explains why some firms may voluntarily impose capital rationing under both capital rationing and a high hurdle a restrictive investment criterion is used to control managerial shirking however implementation of these budgeting rules requires a mechanism to prevent the firm from expanding the investment scale ex post capital rationing in the form of a predetermined fixed budget differs from the high hurdle rate rule in that the former requires the firm to overcome the cost of raising additional capital before making further investment

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

the capital budgeting process incentives and information we study the capital allocation process within firms observed budgeting processes are explained as a response to decentralized information and incentive problems it is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low we also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer there is general agreement that investment decisions are the most important decisions made by corporations the choice of projects and the level of investment is critical not just for stakeholders of the firm but also for the economic well being of society as a whole it has been alleged that u s firms invest too little and tend to overemphasize short term results for example porter 1992 citing poterba and summers 1992 asserts that u s firms use hurdle rates to evaluate investment projects that are higher than their estimated costs of capital to understand the investment behavior of firms one must consider both the process by which external capital is made available to firms and the process by which internally and externally raised capital is allocated to investment projects within the firm considerable attention has been paid to how firms raise external capital the fundamental insight in this area is the celebrated result of modigliani and miller mm that capital structure is irrelevant in the absence of capital market frictions accordingly in the three decades since their contribution research on how external capital is raised has focused on market frictions including information and incentive problems relatively little research has focused on the internal allocation process and its relationship to the organization of the firm modern finance theory prescribes allocating capital according to the net present value npv rule just as the mm result itself provides no theory of the arrangements under which

pessimistic information gathering an agent gathers information on productivity shocks and accordingly produces on behalf of a principal information gathering is imperfect and whether it succeeds or not depends on the agent s effort contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering and there are both moral hazard in information gathering private information on productivity shocks and moral hazard on operating effort an optimal menu of linear contracts mixes high powered productivity dependent screening options following good news with a fixed low powered option otherwise

an explanation for accounting income smoothing it is widely believed that corporate managers often engage in income smoothing taking actions to dampen fluctuations in their firms publicly reported net income one reason given for this is that managers think that investors pay more for a firm with a smoother income stream see ronen and sadan 1981 while there have been many empirical studies attempting to document whether or not income smoothing actually occurs there has been little exploration of why a manager might rationally want to smooth his firm s income explaining why smoothing might be observed and how it can result in an increased stock price is the focus of this paper in two recent studies lambert 1984 and dye 1988 demonstrate in agency settings that a risk averse manager who is precluded from borrowing and lending in the capital markets has an incentive to smooth his firm s reported income in this paper in contrast it is shown that within a market setting an incentive exists for a manager to smooth income that is independent of either risk aversion or restricted access to capital markets the market setting is also useful in that it allows for the analysis of the effect of income smoothing on stock prices it is shown here that if a manager can choose which of two periods to recognize certain income he may prefer the choice that is expected to

impact of adverse selection on managers project evaluation decisions agency theory can be used to explain decisions to continue a failing project the results of a decision making experiment provide empirical support for the proposition that when the conditions for adverse selection exist an agent has private information and an incentive to shirk such decisions apparently irrational from a principal s perspective may be rational from the agent s perspective the traditional approach to rational decision making derived from economic theory assumes a firm s managers will reach decisions that maximize the profitability of their firms managers should invest resources in the projects projected to provide the greatest profits to a firm and then periodically evaluate the economic performance of those projects they should continue the projects projected to be profitable and to avoid losses discontinue those projected to be unprofitable horngren foster 1991 366 380 1 prior research has provided empirical support for the proposition that managers who initiate projects that become unprofitable are more likely to continue supporting those projects than managers who did not initiate them arkes blumer 1985 staw 1976 1981 staw fox 1977 staw ross 1978 the rationale given for this seemingly irrational behavior is that the

possible impact of 2020 bioenergy targets on european union land use a scenario based assessment from national renewable energy action plans proposals according to the renewable energy directive 2009 28 ec the european union member states should increase by 2020 the use of renewable energy to 20 of gross final energy consumption and to reach a mandatory share of 10 renewable energy in the transport sector this study aims to quantify the impact of 2020 bioenergy targets on the land use in the eu based on the projections of the national renewable action plans in four scenarios scenario 1 bioenergy targets according to nreaps scenario 2 bioenergy targets according to nreaps no second generation biofuels scenario 3 bioenergy targets according to nreaps reduced import of biofuels and bioliquids scenario 4 bioenergy targets according to nreaps high imports of biofuels and bioliquids this study also considers the credit for co products generated from biofuel production the analysis reveals that the land used in the eu for bioenergy would range between 13 5 mha and 25 2 mha in 2020 this represent between 12 2 and 22 5 of the total arable land used and 7 3 and 13 5 of the utilised agricultural area uaa in the nreaps scenario about 17 4 mha would be used for bioenergy production representing 15 7 of arable land and 9 4 of uaa the increased demand from biofuels would lead to an increased generation of co products replacing conventional fodder for animal feed considering the co products the land used for bioenergy would range between 8 8 mha and 15 0 mha in 2020 in the various scenarios this represent between 7 9 and 13 3 of the total arable land used in the eu and 4 7 and 8 0 of the uaa in the nreaps scenario when co products are considered about 10 3 mha would be used for biofuels bioliquids and bioenergy production representing 9 3 of arable land and 5 6 of agricultural land this study further provides detailed data on the impact on land use in each member state

on the value relevance of asymmetric financial reporting policies this paper considers an overlapping generations model where investors trade in a firm s stock investment risk is partly determined by the volatility of the stock price at which current investors can sell their shares to the next generation of investors it is shown that asymmetric reporting of good and bad news is value relevant as it affects the allocation of risk among future generations of shareholders

information processing and jury decisionmaking abstract we develop a model to explore the information processing function that jury deliberation and its analogues perform the central question we ask is how much better could a jury possibly perform if it optimally used the collective information available to it than if it decides cases by a simple majority vote before any deliberation or information sharing occurs it is shown how the answer depends on a number of considerations including the correlation among jurors observations the jurors assessments of the relative importance of type i and type ii errors compared with society s assessment of those errors and differences in jurors abilities

accounting conservatism and managerial incentives there are two sources of agency costs under moral hazard 1 distortions in incentive contracts and 2 implementation of suboptimal decisions in the accounting literature the relation between conservative accounting and agency costs of type 1 has received considerable attention cf watts 2002 however little appears to be known about the effects of accounting conservatism on agency costs of type 2 or trade offs between agency costs of types 1 and 2 the purpose of this study is to examine this void in a principal agent setting in which the principal motivates the agent to expend effort using accounting earnings this study shows that accounting earnings become more useful for reducing agency costs of type 2 when measured conservatively than when measured aggressively combined with the result in kwon et al 2001 that agency costs of type 1 decrease with accounting conservatism this analysis suggests that conservative accounting enhances the incentive value of accounting signals with

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

tax subsidies and household saving evidence from canada targeted tax based saving incentives can be a powerful tool for promoting household and national saving this study examines the effect of the cancellation of the registered home ownership savings plan rhosp a canadian tax subsidized saving program on household saving the cancellation provides exogenous variation in eligibility for the subsidy that is uncorrelated with householdspecific heterogeneity in saving behavior the empirical analysis suggests that the subsidy had a substantial impact on saving each dollar contributed to the program represented 56 93 and 20 57 cents of new household and national saving respectively

delegation of investment decisions and optimal remuneration of agents abstract we analyze an investor who delegates information acquisition and investment decisions to an agent the investor cannot monitor the agent s effort or information optimal pay schemes contain bonuses that increase with the net return rate of the investment but unlike conventional contracts at a decreasing rate moreover investments with low return rates are penalized again unlike conventional contracts nevertheless it may be optimal for the investor to reward the agent above the agent s reservation utility we examine the role of the agent s risk attitude for the shape of the pay scheme and whether firing after bad investments is a more effective threat than reduced pay we also analyze how the nature of the contract changes if the agent is given bargaining power

managerial career concerns and investments in information we extend the implicit incentives literature by analyzing how career concerns affect a riskneutral manager s decision about how much to learn about a project before investing in it the manager has unknown ability that determines the probability with which a good project is available so the market updates ability assessments from project outcomes while project choice is efficient in equilibrium an unobservable investment in the precision of project evaluation allows the manager to control the probabilities of future reputational states this distorts his investment in precision above first best when project payoffs can be observed only on accepted projects

moral hazard and contractibility in investment decisions abstract this paper uses a principal agent framework to study the incentive effects of contractibility and moral hazard at the first stage of a two stage investment decision we show that when the intermediate signal is publicly observable and contractible there is overinvestment relative to the first best in second stage production purely for incentive reasons however if the intermediate signal cannot be contracted on and in addition the agent and the principal are permitted to act opportunistically the optimal delegated investment decision is to underinvest we discuss the implications of our analysis for the literature on costly monitoring

barriers within firms to energy efficient investments abstract many investments in energy efficiency fail to be made despite their apparent profitability internal hurdle rates are often set at levels higher than the cost of capital to the firm reasons for these practices include bounded rationality principal agent problems and moral hazard the policy implication is that government can simultaneously improve overall energy efficiency and increase private sector productivity by providing informational and organizational services that go beyond the traditional regulatory framework

a theory of yes men this paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation this desire to conform arises endogenously from the firm s need to induce the worker to exert effort the author shows that firms may optimally eschew the use of incentive contracts to retain workers incentives for honesty the author illustrates that the incentive to conform implies inefficiencies even when workers are risk neutral and is likely to lead to more centralized decision making than in the absence of the desire to conform copyright 1993 by american economic association

conservative accounting choices managers have sufficient discretion under generally accepted accounting principles gaap to adopt more or less conservative financial reporting policies in this paper we develop a signaling model to provide insight into managers decisions to be conservative in their accounting we provide conditions under which the market can use the manager s exercise of discretion to infer her private information about the future prospects of the firm and thus firm value under these conditions we also show that there are meaningful differences between earnings response coefficients for firms whose managers choose a conservative reporting policy and those whose managers do not finally we use our theoretical model to provide intuition for some established empirical results on earnings response coefficients

sunk cost fallacy in driving the world s costliest cars we develop a behavioral model of durable good usage with mental accounting for sunk costs it predicts higher than rational usage that attenuates at a rate that increases with sunk costs singapore government policy varied the sunk cost of buying a new car using singapore data we estimate the elasticity of driving with respect to sunk costs to be 0 048 which implies that government policy between 2009 and 2013 was associated with 86 kilometers per month or 5 6 more driving the results are robust to specifying sunk costs as relative to buyer income and estimation with hong kong data we believe this to be the first field evidence of the sunk cost fallacy in usage of a major durable good the online appendix is available at https doi org 10 1287 mnsc 2016 2651 this paper was accepted by john list behavioral economics

sustainability constraints in determining european bioenergy potential a review of existing studies and steps forward abstract this paper reviews european land and bioenergy potential studies to 1 identify shortcomings related to how they account for agricultural intensification and its associated environmental effects and sustainability constraints and 2 provide suggestions on how these shortcomings can be improved in future assessments the key shortcomings are the environmental impacts of intensification are nearly always ignored in the reviewed studies while these impacts should be accounted for if intensification is required to make land available for energy cropping future productivity developments of crops and livestock and the associated land use and environmental effects are currently limited to conventional intensification measures whereby the proportion between inputs and outputs is fixed sustainable intensification measures which increase land productivity with similar or lower inputs are ignored in the reviewed studies livestock productivity developments livestock specific intensification measures and their environmental effects are poorly or not at all covered in the reviewed studies most studies neglect sustainability constraints other than ghg emissions in the selection of energy crops this includes limitations to rainfed energy crop cultivation a minimum number of crop species the structural diversity within cropping areas and the integration of energy crops in existing or new crop rotations while simultaneously considering the effects on subsequent crops these shortcomings suggest that the identification of sustainable pathways for european bioenergy production requires a more integrative approach combining land demand for food feed and energy crop production including different intensification pathways and the consequent direct and indirect environmental impacts a better inclusion of management practices into such approach will improve the assessment of intensification its environmental consequences and the sustainable bioenergy potential from agricultural feedstocks

relative performance evaluation and project selection relative performance evaluation rpe occurs when one person s compensation depends on the relation of his output to that of others agency theory e g lazear and rosen 1981 and holmstrom 1979 1982 predicts that managerial compensation will use relative performance when other firms outputs reveal information about the manager s actions which is not knowable from the manager s output alone tests of the theory measure other firms outputs using the performance of other firms in the same industry or some macroeconomic measures of performance these two approaches are designed to separate industry and economy effects from the effects of the manager s actions empirical tests by antle and smith 1986 and janakiraman lambert and larcker 1992 found limited evidence that managerial compensation is adjusted for industry effects gibbons and murphy 1990 found some adjustment in ceo compensation for industry performance and much more adjustment for changes in market wide rates of return this paper provides an explanation for these empirical results by illustrating how the benefits of rpe based schemes depend on the absence of project choice decisions in the canonical agency model 1

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

the effect of risk on the ceo market this article presents a market equilibrium model of ceo assignment pay and incentives under risk aversion and moral hazard each of the three outcomes can be summarized by a single closed form equation in the presence of moral hazard assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented ceos such firms also pay higher salaries in the cross section but economywide increases in risk or the disutility of being a ceo do not affect pay the strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion if the ceo can affect firm risk incentives rise and are increasing in risk and risk aversion we calibrate the losses from various forms of poor corporate governance such as failures in monitoring and inefficiencies in ceo assignment jel g34 j33 this article presents a market equilibrium model of ceo assignment pay and incentives risk averse managers of different talents are hired in a competitive market by heterogeneous firms which vary in their size risk and level of effort required the level of pay drives the assignment of talent to firms the strength of incentives induces the efficient effort level and is determined by an optimal contracting approach our main contribution is to incorporate risk into a ceo market equilibrium in a tractable manner a large empirical literature has shown that risk is a firstorder determinant of compensation contracts demsetz and lehn 1985 garen 1994 core and guay 1999 oyer and schaefer 2004 peters 2009 peters and wagner 2009 but most theories assume risk neutrality this assumption is

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies