Table Of ContentEconomic Analysis of Information
and Contracts
Essays in Honor of John E. Butterworth
Economic Analysis of Information
and Contracts
Essays in Honor of John E. Butterworth
Edited by
Gerald A. Feltham
University of British Columbia
Amin H. Amershi
University of Minnesota
and
William T. Ziemba
University of British Columbia
~.
Kluwer Academic Publishers
"Boston
Distributors
for the United States and Canada: Kluwer Academic Publishers, 101
Philip Drive, Assinippi Park, Norwell, MA 02061.
for the UK and Ireland: Kluwer Academic Publishers, Falcon House,
Queen Square, Lancaster LAI lRN, UK.
for all other countries: Kluwer Academic Publlsners Group, Distribution
Centre, P.O. Box 322, 3300 AH Dordrecht, The Netherlands
Library of Congress Cataloging-in-Publication Data
Economic analysis 01 information and contracts: essays in honor of John
E. Butterworth/edited by Gerald A. Feltham, Amin H. Amershi, and
William T. Ziemba.
p. cm.
Bibliography: p.
Includes index.
ISBN-13: 978-94-010-7702-6 e-ISBN-13: 978-94-009-2667-7
001: 10.1007/976-94-009-2667-7
1. Accounting. 2. Information theory in economics.
3. Butterworth, John E. I. Butterworth, John E. II. Feltham.
Gerald A., 1936- III. Amershi, Amin H. IV. Ziemba, W. T.
HF5625.E28 1988
657--dc 19 87-22508
CIP
© 1988 by Kluwer Academic Publishers, Boston
Softcover reprint of the hardcover 1st edition 1988
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means,
mechanical, photocopying, recording, or otherwise, without the prior
written permisSion of the publishers.
Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell,
MA 02061
Typeset by Macmillan India Ltd., Bangalore 25.
JOHN E. BUTTERWORTH
JOHN E. BUTTERWORTH, BA, MA, MBA, Ph.D.
1926-1984
On August 4, 1984, at the age of 58, John E. Butterworth died of cancer. He
is survived by his wife Faye, their six children, and his parents. He was greatly
respected and appreciated by his colleagues at the University of British
Columbia and by all others who knew him. He will be greatly missed.
John was born in Manchester, England, in 1926. He studied English at
Cambridge, receiving his Bachelor's degree in 1947 and his Master's degree
in 1950. From 1950 to 1961, John was successively a works manager, pro-
duction manager, and company director for Fine Wool Fabrics Ltd. of
Wexford, Ireland.
In 1962, John and his family moved to Berkeley, California. John sought to
enter the North American management job market by obtaining an MBA at
the University of California, and he completed that degree in 1963. In the
course of his MBA studies, the faculty encouraged John to study for his Ph.D.
and to enter the academic job market. John made that switch, studying
accounting and operations research, and completed his degree in 1967. Upon
graduation he joined the faculty at Johns Hopkins University in Baltimore,
Maryland, where he taught both accounting and operations research. While
John was at the University of California, Dean Philip White had attempted
to entice him to join the Commerce faculty at the University of British
Columbia, and in 1969 Dean White was successful in that endeavor.
At the time John came to UBC, the faculty was in the midst of significant
changes. The undergraduate program was undergoing major modifications
and many new faculties were being added in order to increase the faculty's
research capability, to strengthen its Master's program, and to introduce a
Ph.D. program. John played an important role in all of these areas, and was
greatly respected for the contributions that he made.
vii
Vlll JOHN E. BUTTERWORTH, 1926-1984
John provided leadership to the faculty throughout his career at UBC, and
particularly assisted the faculty by serving in some key management posi-
tions. He was the director of graduate studies from 1971 to 1973, chairman of
the Accounting and Management Information Systems Division from 1974
to 1977, and director of the Ph.D. program from 1981 to 1984. In each case
he provided strong, sensitive leadership. In addition, he served at various
times on the Executive Committee; the Appointments, Promotion and
Tenure Committee; the Dean's Selection Committee; and the Dean's
Advisory Committee.
John also provided leadership through his course development activities.
He was instrumental in developing a management planning and control
emphasis in the undergraduate and graduate cost accounting courses, and in
applying quantitative methods in these courses. Furthermore, he initiated a
graduate course in information economics and continually modified its
content so that our Master's and Ph.D. students were provided with a strong
research foundation in this area.
John's leadership in various aspects of the graduate program in the Faculty
of Commerce of the University of British Columbia was a natural extension
of his strong interest in research. That interest had been kindled at the
University of California. Accounting research underwent a dramatic change
in the mid-sixties as two new major research areas were developed. At the
University of Chicago, Ph.D. students were beginning to explore the relation-
ship between accounting numbers and stock market prices and at the
University of California, Ph.D. students were beginning to apply concepts
from information economics to accounting theory. John was one of those
students and his Ph.D. dissertation was among the very first to explore the
link between accounting and information economics. The quality of that
research is reflected in the fact that his dissertation received honorable
mention in the McKinsey Foundation Doctoral Thesis Award. This compe-
tition was open to dissertations from all business schools in all areas of
research, and the submitted dissertations were evaluated by a distinguished
panel of business school researchers in a variety of disciplines.
John's dissertation was but the first step in his exploration of the funda-
mental economic factors that influence the demand for information in general
and accounting information in particular. His research from 1967 to 1984 is
reviewed in Part I of this volume.
Contents
Photo of John E. Butterworth v
John E. Butterworth, BA, MA, MBA, PhD: 1926-1984 vii
List of Contributors xi
Preface xiii
Acknowledgments xiv
PART I: INTRODUCTION
John E. Butterworth's Pioneering Contributions to the Accounting and
Information Economics Literature
-Gerald A. Feltham 3
Introduction to the Research Papers in this Volume 17
PART II: INFORMATION EVALUATION IN MULTIPERSON CONTEXTS 23
1. Blackwell Informativeness and Sufficient Statistics with Applications
to Financial Markets and Multiperson Agencies
-Amin H. Amershi 25
2. The Social Value of Public Information in Production Economies
-James A. Ohlson 95
3. Costly Public Information: Optimality and Comparative Statics
-Young K. Kwon and D. Paul Newman 121
IX
x CONTENTS
4. Value of Information in Bimatrix Games
-Joel S. Demski 141
PART III: CONTRACTING IN AGENCIES UNDER MORAL HAZARD 167
5. The Principal/Agent Problem-Numerical Solutions
-Phelim P. Boyle and John E. Butterworth 169
6. Explorations in the Theory of Single- and Multiple-Agent Agencies
-Amin H. Amershi and John E. Butterworth 197
7. Sequential Choice Under Moral Hazard
-Ella Mae Matsumura 221
8. Risk Sharing and Valuation Under Moral Hazard
-Patricia J. Hughes 247
PART IV: CONTRACTING IN AGENCIES WITH PRIVATE INFORMATION 269
9. Communication of Private Information in Capital Markets: Colll:ingent
Contracts and Verified Reports
-Gerald A. Feltham and John S. Hughes 271
10. Managerial Compensation: Linear-Sharing vs. Bonus-Incentive
Plans under Moral Hazard and Adverse Selection
-Masako N. Darrough and Neal M. Stoughton 319
11. Intrafirm Resource Allocation and Discretionary Actions
-Ronald A. Dye 349
12. Accountants' Loss Functions and Induced Preferences for
Conservatism
-Rick Antle and Richard A. Lambert 373
Subject Index 409
Author Index 413
List of Contributors
Amin H. Amershi School of Management
University of Minnesota
Minneapolis, Minnesota 55455
Rick Antle School of Organization and Management
Yale University
New Haven, Connecticut 06520
Phelim P. Boyle Accounting Group
University of Waterloo
Waterloo, Ontario N2L 3G1
John E. Butterworth Deceased
Masako N. Darrough Graduate School of Business
Columbia University
New York, New York 10027
Joel S. Demski School of Organization and Management
Yale University
New Haven, Connecticut 06520
Ronald A. Dye Kellogg School of Management
Northwestern University
Evanston, Illinois 60201
Gerald A. Feltham Faculty of Commerce and Business Administration
University of British Columbia
Vancouver, British Columbia V6T 1Y8
John S. Hughes Faculty of Commerce and Business Administration
University of British Columbia
Vancouver, British Columbia V6T 1Y8
XI
xii LIST OF CONTRIBUTORS
Patricia J. Hughes Graduate School of Management
University of California
Los Angeles, Cal ifornia 90024-1481
Young K. Kwon Department of Accountancy
College of Commerce and Business Administration
University of Illinois at Urbana-Champaign
Champaign, Illinois 61820
Richard A. Lambert The Wharton School
University of Pennsylvania
Philadelphia, Pennsylvania 19104
Ella Mae Matsumura School of Business
University of Wisconsin-Madison
Madison, Wisconsin 53706
James A. Ohlson Graduate School of Business
Columbia University
New York, New York 10027
D. Paul Newman Department of Accounting
Graduate School of Business
University of Texas
Austin, Texas 78712
Neal M. Stoughton Graduate School of Management
University of California
Irvine, California 92717
