On the Effects of the Degree of Discretion in Reporting Managerial performance
AbstractWe consider a principal-agent setting in which a manager’s compensation de- pends on a noisy performance signal, and the manager is granted the right to choose an (accounting) method to determine the value of the performance signal. We study the effect of the degree of such reporting discretion, measured by the number of acceptable methods, on the optimal contract, the expected cost of com- pensation and the manager’s expected utility. We find that while an increase in reporting discretion never harms the manager, the effect on the expected cost of compensation is more subtle. We identify three main effects of increased report- ing discretion and characterize the conditions under which the aggregate of these three effects will lead to a higher or lower cost of compensation.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-21.
Date of creation: 2008
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managerial compensation; reporting flexibility;
Other versions of this item:
- De Waegenaere, A.M.B. & Wielhouwer, J.L., 2011. "On the effects of the degree of discretion in reporting managerial performance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4260929, Tilburg University.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-02-23 (Accounting & Auditing)
- NEP-ALL-2008-02-23 (All new papers)
- NEP-BEC-2008-02-23 (Business Economics)
- NEP-CTA-2008-02-23 (Contract Theory & Applications)
- NEP-UPT-2008-02-23 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Dye, Ronald A. & Magee, Robert P., 1991. "Discretion in reporting managerial performance," Economics Letters, Elsevier, vol. 35(4), pages 359-363, April.
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