Economics of Accounting: Performance Evaluation: 2 (Springer Series in Accounting Scholarship)

675 Pages·2005·29.86 MB·English

by  Peter Ove Christensen

ECONOMICS OF ACCOUNTING
Volume II - Performance Evaluation
Springer Series in Accounting Scholarship
Series Editor:
Joel S. Demski
Fisher School of Accounting
University of Florida
Books in the series:
Christensen, Peter O., Feltham, Gerald A.
Economics of Accounting - Volume I
Information in Markets
Christensen, Peter O., Feltham, Gerald A.
Economics of Accounting - Volume II
Performance Evaluation
ECONOMICS OF ACCOUNTING
Volume n - Performance Evaluation
Peter O. Christensen
University ofAarhus and
University of Southern Denmark-Odense
Gerald A. Feltham
The University of British Columbia, Canada
Springer
Library of Congress Cataloging-in-Publication Data
A CLP. Catalogue record for this book is available
from the Library of Congress.
Economics of Accounting -Volume II, Performance Evaluation
Peter O. Christensen and Gerald A. Feltham
ISBN 0-387-26597-X e-ISBN 0-387- 26599-6 Printed on acid-free paper.
ISBN 978-0387-26597-1
© 2005 Springer Science+Business Media, Inc.
All rights reserved. This work may not be translated or copied in whole or in part without
the written permission of the publisher (Springer Science+Business Media, Inc., 233 Spring
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or hereafter developed is forbidden.
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Printed in the United States of America.
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To
Kasper, Esben, and Anders
Tracy, Shari, and Sandra
CONTENTS
Foreword to Volume I by Joel S. Demski xv
Preface to Volume I xvii
Preface to Volume II xxi
16. Introduction to Performance Evaluation 1
16.1 An Illustration of a Principal-agent Relationship 3
16.2 Basic Single-period/Single-agent Settings 7
16.2.1 Optimal Contracts 7
16.2.2 Ex Post Reports 10
16.2.3 Linear Contracts 12
16.2.4 Multiple Tasks 14
16.2.5 Stock Prices and Accounting Numbers 16
16.3 Private Agent Information and Renegotiation
in Single-period Settings 18
16.3.1 Some General Comments 18
16.3.2 Post-contract, Pre-decision Information 19
16.3.3 Pre-contract Information 20
16.3.4 Intra-period Renegotiation 22
16.4 Multi-period/single-agent Settings 24
16.4.1 Full Commitment with Independent Periods 24
16.4.2 Timing and Correlation of Reports in a Multi-period
LENMOAQX 25
16.4.3 Full Commitment with Interdependent Periods 26
16 A A Inter-period Renegotiation 29
16.5 Multiple Agents in Single-period Settings 30
16.5.1 Multiple Productive Agents 30
16.5.2 A Productive Agent and a Monitor 33
16.6 Concluding Remarks 35
References 35
PARTE
PERFORMANCE EVALUATION IN
SINGLE-PERIOD/SINGLE-AGENT SETTINGS
17. Optimal Contracts 39
17.1 Basic Principal-agent Model 40
17.1.1 Basic Model Elements 40
17.1.2 Principal's Decision Problem 42
17.1.3 Optimal Contract with a Finite Action and
Outcome Space 44
viii Contents
\12 First-best Contracts 45
17.3 Risk and Effort Aversion 48
17.3.1 Finite Action Space 49
17.3.2 Convex Action Space 59
17.3.3 Convex Outcome Space - The Mirrlees Problem 68
17.3.4 Randomized Contracts 71
17.4 Agent Risk Neutrality and Limited Liability 73
17.5 Concluding Remarks 78
Appendix 17A: Contract Monotonicity and
Local Incentive Constraints 79
Appendix 17B: Examples that Satisfy Jewitt's Conditions for the
Sufficiency of a First-order Incentive Constraint 86
Appendix 17C: Characteristics of Optimal Incentive Contracts for
KARA Utility Functions 88
References 92
18. Ex Post Performance Measures 95
18.1 Risk Neutral Principal "Owns" the Outcome 96
18.1.1 ^-Informativeness 98
18.1.2 Second-order Stochastic Dominance with Respect
to the Likelihood Ratio 105
18.1.3 A Hurdle Model Example Ill
18.1.4 Linear Aggregation of Signals 115
18.2 Risk Averse Agent "Owns" the Outcome 120
18.3 Risk Averse Principal "Owns" the Outcome 124
18.3.1 Economy-wide and Firm-specific Risks 125
18.3.2 Hurdle Model with Economy-wide and
Firm-specific Risks 131
18.4 Costly Conditional Acquisition of Information 135
18.5 Concluding Remarks 147
Appendix 18A: Sufficient Statistics versus
Sufficient Incentive Statistics 148
References 150
19. Linear Contracts 153
19.1 Linear Simplifications 154
19.2 Optimal Linear Contracts 158
19.2.1 Binary Signal Model 159
19.2.2 Repeated Binary Signal Model 161
19.2.3 Multiple Binary Signals 164
19.2.4 Brownian Motion Model 166
19.3 Concluding Remarks 179
References 180
Contents ix
20. Multiple Tasks and Multiple Performance Measures 181
20.1 Basic Multi-task Model 182
20.1.1 General Formulation of the Principal's Problem 182
20.1.2 Exponential Utility with Normally Distributed
Compensation 184
20.2 Allocation of Effort Among Tasks with Separable Effort Costs 186
20.2.1 A "Best" Linear Contract 186
20.2.2 The Value of Additional Performance Measures 190
20.2.3 Relative Incentive Weights 192
20.2.4 Special Cases 193
20.2.5 Induced Moral Hazard 201
20.3 Allocation of Effort Among Tasks with Non-separable
Effort Costs 210
20.4 Log-linear Incentive Functions 216
20.5 Concluding Remarks 218
References 219
21. Stock Prices and Accounting Numbers as
Performance Measures 221
21.1 Ex Post Equilibrium Stock Price 222
21.2 Stock Price as an Aggregate Performance Measure 224
21.3 Stock Price as Proxy for Non-contractible Investor
Information 228
21.3.1 Exogenous Non-contractible Investor Information ... 230
21.3.2 A Fraction of Privately Informed Investors 231
21.3.3 Comparative Statics 238
21.4 Options Versus Stock Ownership in Incentive Contracts .... 246
21.4.1 Optimal Incentive Contract 246
21.4.2 Incentive Contracts Based on Options and Stock
Ownership 251
21.5 Concluding Remarks 255
References 256
PARTF
PRIVATE AGENT INFORMATION AND RENEGOTIATION
IN SINGLE-PERIOD/SINGLE-AGENT SETTINGS
22. Post-contract, Pre-decision Information 259
22.1 The Basic Model and the Revelation Principle 259
22.2 The Hurdle Model 266
22.3 Perfect Private Information 267
22.4 Imperfect Private Information 270
X Contents
22.4.1 Some Benchmarks 270
22.4.2 Examples of Private Imperfect Information with
and without Communication 274
22.5 Is an Informed Agent Valuable to the Principal? 277
22.6 Delegated Information Acquisition 282
22.7 Sequential Private Information and the Optimal Timing of
Reporting 286
22.8 Impact of Disclosure on the Information Revealed
by the Market Price 292
22.9 Concluding Remarks 303
References 304
23. Pre-Contract Information - Uninformed Principal Moves First 305
23.1 Basic Model 305
23.2 Perfect Private Information 308
23.3 Imperfect Private Information 313
23.4 Mechanism Design 323
23.4.1 Basic Mechanism Design Problem 324
23.4.2 A Possibility of No Private Information 332
23.4.3 To Be or Not to Be Informed Prior to Contracting . . . 335
23.4.4 Impact of a Public Report on Resource Allocation ... 337
23.4.5 Early Reporting 342
23.5 Concluding Remarks 348
Appendix 23 A: Proof of Proposition 23.6 349
References 351
24. Intra-period Contract Renegotiation 353
24.1 Renegotiation-proof Contracts 355
24.2 Agent-reported Outcomes 363
24.3 Renegotiation Based on Non-contractible Information 366
24.3.1 Renegotiation after Unverified Observation
of the Agent's Action 367
24.3.2 Renegotiation after Observing a Non-contractible,
Imperfect Signal about the Agent's Action 368
24.3.3 Information about Outcome before Renegotiation ... 371
24.4 Private Principal Information about the Agent's Performance 371
24.5 Resolving Double Moral Hazard with a Buyout Agreement . 376
24.6 Concluding Remarks 378
References 379