IDEAS home Printed from https://ideas.repec.org/a/bla/randje/v38y2007i3p698-713.html
   My bibliography  Save this article

The economics of earnings manipulation and managerial compensation

Author

Listed:
  • Keith J. Crocker
  • Joel Slemrod

Abstract

This paper examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm. When realized, these earnings constitute hidden information that is privately observed by the manager, who may expend resources to generate an inflated earnings report. We characterize the optimal managerial compensation contract in this setting, and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits, and to report those profits honestly. As a result, some degree of earnings management must be tolerated as a necessary part of an efficient agreement.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Keith J. Crocker & Joel Slemrod, 2007. "The economics of earnings manipulation and managerial compensation," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 698-713, September.
  • Handle: RePEc:bla:randje:v:38:y:2007:i:3:p:698-713
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.0741-6261.2007.00107.x
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gresik, Thomas A. & Nelson, Douglas R., 1994. "Incentive compatible regulation of a foreign-owned subsidiary," Journal of International Economics, Elsevier, pages 309-331.
    2. Foster, James E & Frierman, Michael, 1990. "Learning Rational Expectations: Classical Conditions Ensure Uniqueness and Global Stability," Economica, London School of Economics and Political Science, pages 439-453.
    3. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
    4. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    5. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, pages 1593-1610.
    6. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    7. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, pages 1593-1610.
    8. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
    9. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, pages 329-369.
    10. Alexander, Cindy R. & Cohen, Mark A., 1999. "Why do corporations become criminals? Ownership, hidden actions, and crime as an agency cost," Journal of Corporate Finance, Elsevier, pages 1-34.
    11. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    12. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    13. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
    14. Gresik, Thomas A. & Nelson, Douglas R., 1994. "Incentive compatible regulation of a foreign-owned subsidiary," Journal of International Economics, Elsevier, pages 309-331.
    15. Claudio Mezzetti, 2004. "Mechanism Design with Interdependent Valuations: Efficiency," Econometrica, Econometric Society, vol. 72(5), pages 1617-1626, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:randje:v:38:y:2007:i:3:p:698-713. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/randdus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.