A simple two-period model with information asymmetry and restriction on transfers is used to induce an inter temporal relationship between a sequence of investment decisions. The owner's reputation for honoring commitments to ex post inefficient production decisions allows her to make efficient use of the manager's private information regarding the first period cost. In particular, she commits to produce more in period two if the manager discloses favorable information regarding period one investment activity. As a result, both the owner and manager benefit from the long-term relationship. Mark-to market accounting is then imposed and a valuation exercise is conducted. The information problem causes the accrual for future economic opportunities to be directly related to prior period cash flows and induces a relationship between period one and period two cash flows that is consistent with empirical regularities found in the literature.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.