communication and income smoothing through accounting method choice this paper shows how accounting income smoothing could arise as rational equilibrium behavior i develop a two period agency model in which an agent obtains after the first period s production operation private information regarding future productivity of the operation direct communication of the agent s private signal yields a strict pareto improvement over no communication in this two period world since it allows the agent to achieve signal contingent interperiod consumption smoothing delegation of accounting method choice to the agent is shown to be an alternative pareto equivalent mechanism to direct communication in this paper thus accounting method choice is one way to achieve interperiod signal contingent consumption smoothing by smoothing accounting income one such accounting choice which arises from the structure of the problem is the choice of depreciation method

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

information and incentives the agency information problem this paper considers the use of imperfect information for risk sharing and incentive purposes when perfect observation of actions and outcomes is impossible making complete contracting infeasible the incentive insurance problem is defined to consist of two parts the choice of an information system and the design of a sharing rule based on the information system a generalized agency model is formulated to analyse this problem the agency models of ross 1973a b wilson 1968 stiglitz 1974 mirrlees 1976 harris and raviv 1979 holmstrom 1979 a o appear as special cases of the generalized model the analysis focuses on the value of information in the agency information problem the set of information systems which are valuable i e improve risk sharing and incentives in a pareto sense is characterized a problem independent ranking of information systems for the agency information problem is then characterized under the assumption that the agent s preferences are additive in money and actions the ranking may be viewed as a generalization of blackwell s ranking of information systems for decision problems to this particular game when the agent s risk preferences depend on his choice of action on the other hand it is shown that the blackwell ranking may be invalid randomized incentive schemes are shown to be efficient when the incentive effect of risk is positive and sufficiently large relative to the absolute risk aversion of the partners

incentive efficiency of compensation based on accounting and market performance abstract this paper analyzes how earnings and price are used in executive compensation contracts risk averse shareholders collectively design a contract and individually trade in the stock market in the optimal linear contract the use of earnings and price depends critically on incentive efficiency i e how precisely the measures convey the true outcome the relative weight of price to earnings exaggerates the true relative importance of price because price impounds traders overall information while its informational value lies in the incremental information it provides the use of price allows shareholders to share trading risks with managers

contracts without memory in multiperiod agency models abstract settings are considered in which optimal multiperiod contracts can have no memory i e where second period payments do not need to depend on first period outcomes if contracts have no memory a repeated agency game can be played myopically there are no gains to long term relationships conditions on preferences for a no memory contract are presented in an agency game with moral hazard on the act selection preference separability and domain additivity imply the existence of a no memory contract in a setting without moral hazard but with asymmetric information on the outcome domain additivity implies no memory

an analysis of the relation between the stewardship and valuation roles of earnings in this paper we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes we explore linkages between weights on earnings in compensation contracts and in stock price formation a distinction between the valuation and incentive contracting roles of earnings in paul 1992 produces the null hypothesis that valuation earnings coefficients vecs and compensation earnings coefficients cecs are unrelated our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971 2000 rejects paul s 1992 hypothesis of no relation we also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation specifically we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings

optimal multiperiod contracts and the gain from enduring relationships under private information informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts in an illustrative risk sharing model even relatively short two period contracts can be mutually beneficial if there is private information though one period contracts suffice otherwise further contracts which are pareto optimal relative to the environment and the information structure are defined and partially characterized an example illustrates how otherwise inefficient intertemporal tie ins can be used optimally to mitigate incentive problems the obvious borrowing lending schemes are not private information pareto optimal in these period by period actions are not sufficiently constrained discounting affects the form of the optimal contract but none of these qualitative conclusions

is there an energy efficiency gap many analysts have argued that energy efficiency investments offer an enormous win win opportunity to both reduce negative externalities and save money this overview paper presents a simple model of investment in energy using capital stock with two types of market failures first uninternalized externalities from energy consumption and second forces such as imperfect information that cause consumers and firms not to exploit privately profitable energy efficiency investments the model clarifies that only if the second type of market failure cannot be addressed directly through mechanisms such as information provision energy efficiency subsidies and standards may be merited this chapter therefore reviews the empirical work on the magnitude of profitable unexploited energy efficiency investments a literature which frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured these problems notwithstanding recent empirical work in a variety of contexts implies that on average the magnitude of profitable unexploited investment opportunities is much smaller than engineering accounting studies suggest finally there is tremendous opportunity and need for policy relevant research that utilizes randomized controlled trials and quasi experimental techniques to estimate the returns to energy efficiency investments and the welfare effects of energy efficiency programs

ex ante randomization in agency models we consider how a principal can use randomized strategies in designing optimal contracts in agency settings we distinguish between ex post randomization overfee schedulesfollowing act selection by the agent and ex ante randomization overfee schedules before act selection we show that ex ante randomization may be efficient in both full information and private information settings under certain assumptions regarding preferences and the production technology it is particularly significant that additive separability and concavity ofthe agent s utility function as well as concavity of the production function do not rule out efficient ex ante randomized contracts in private information settings although as is known they rule out ex post randomization

preference representation and randomization in principal agent contracts abstract conditions on an agent s preferences that induce a demand for ex ante randomization are derived when the agent has constant absolute risk aversion in wealth but additive separable preferences in wealth and effort optimal contracts often require randomization under additive separability the principal can use randomization to exploit the interaction between incentive considerations and the agent s outside opportunities however when the agent has constant absolute risk aversion in wealth but multiplicative separable preferences participation and incentive considerations separate hence optimal contracts do not exhibit ex ante randomization

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

estimating technology in the postal sector a bayesian approach abstractthe aim of this article is to study the technology of the sector represented by the spanish national post office and telegraph service sociedad estatal correos y telegrafos s a trading as correos and denominated as such hereafter concretely we analyse economic efficiency technical and allocative and scale economies of the production units cost centres of correos to do this we employ a methodology based on an input distance function which is the dual of the cost function moreover and applying duality theory we develop an economic model to assess the effect of postal infrastructures on the operators costs in order to carry out the empirical model bayesian econometrics is applied to estimate the parameters in the input distance function and the technical and allocative efficiency terms

efficient timing of communication in multiperiod agencies this paper examines communication in a two period principal agent model in which the agent receives a private signal about the second outcome before the first outcome is realized no communication is compared with communication at three possible dates before the first outcome early at the first outcome consumption date normal and between the initial consumption date and the second outcome delayed delayed communication is shown to have no value if the agent s information is perfect but can have value if it is imperfect early and normal communication can be used to smooth compensation across periods and hence generally have incremental value over delayed communicationif the agent cannot borrow or save however the smoothing benefits disappear if he can borrow and save early and normal communication are equivalent if the agent has domain additive exponential preferences and the private signal is uninformative about the first outcome if the private signal is informative about the first outcome the incremental value of early compared with normal communication attains its maximum for medium informativeness a unifying example is used throughout

optimal incentives and asymmetric distribution of information abstract the problem of designing optimal incentive schemes arises if information is asymmetrically distributed among individuals the existence and the welfare properties of optimal incentive schemes are discussed for cases where the information asymmetry refers either to the quality of a product or to the behaviour of an individual

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 role of installment payments in contracts for services this article studies the role of installment payments in relationships characterized by moral hazard and sunk costs we rule out vertical integration and payments contingent on the product of the contractor instead each payment is negotiated as and when made in such circumstances an initial down payment serves to redress the weakness of the contractor in ex post renegotiations if higher effort by the contractor in thefirst stage increases the marginal product of effort in the second stage a second installment payment induces the contractor to invest greater effort initially

the effects of risk aversion on production decisions in decentralized organizations this paper presents a principal agent model in which subsequent to contracting the risk averse agent becomes informed about the production process communication of the agent s information is always valuable the optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric leading to an efficiency loss comparative statics show that the loss in expected production increases as the agent becomes more risk averse

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