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Contract-Based Motivation for Keeping Records of a Manager's Reporting and Budgeting History

Author

Listed:
  • Anil Arya

    (The Ohio State University, College of Business, 1775 College Road, Columbus, Ohio 43210-1399)

  • John C. Fellingham

    (Pennsylvania State University, College of Business Administration, University Park, Pennsylvania 16802)

  • Richard A. Young

    (The Ohio State University, College of Business, 1775 College Road, Columbus, Ohio 43210-1399)

Abstract

This paper analyzes the role of the agent's bankruptcy constraints in multiperiod principal-agent models with asymmetric information. Conditions are provided under which commitment to a long-term contract involving N rounds of investment improves upon repetition of N identical single-period contracts. Further, when the agent's reservation wage is sufficiently low the optimal contract is always long term. Keeping records of a manager's history of reporting activity facilitates contracting, since optimal contracts may require a link between past reports and future investments over a duration of two or more periods.

Suggested Citation

  • Anil Arya & John C. Fellingham & Richard A. Young, 1994. "Contract-Based Motivation for Keeping Records of a Manager's Reporting and Budgeting History," Management Science, INFORMS, vol. 40(4), pages 484-495, April.
    • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:4:p:484-495
    DOI: 10.1287/mnsc.40.4.484
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    Cited by:

    1. Katrin Weiskirchner-Merten, 2020. "Interdependence, participation, and coordination in the budgeting process," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 247-274, April.
    2. Stanley Baiman & Mirko S. Heinle & Richard Saouma, 2013. "Multistage Capital Budgeting with Delayed Consumption of Slack," Management Science, INFORMS, vol. 59(4), pages 869-881, April.

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