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Performance Measurement in Multi-Period Agencies

Author

Listed:
  • Sunil Dutta
  • Stefan Reichelstein

Abstract

This paper analyzes a dynamic moral hazard problem in which the agent's unobservable effort in each period affects both current and future cash flows. For incentive contracting purposes, the principal can rely on realized and projected future cash flows. We find that a properly structured accrual accounting system identifies precisely the value added by the agent in each period, and this information is sufficient for providing optimal incentives. In contrast, the principal will lose intertemporal flexibility if the agent's compensation is based exclusively on realized cash flows. Such incentive schemes can be optimal only if the underlying agency problem is stationary.

Suggested Citation

  • Sunil Dutta & Stefan Reichelstein, 1999. "Performance Measurement in Multi-Period Agencies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 158-158, March.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199903)155:1_158:pmima_2.0.tx_2-u
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    References listed on IDEAS

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    1. Marie-Odile Yanelle, 1997. "Banking Competition and Market Efficiency," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 215-239.
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    Cited by:

    1. Barbara Harreiter & Thomas Pfeiffer & Georg Schneider, 2007. "Are real options more valuable in the presence of agency conflicts?," Review of Managerial Science, Springer, pages 185-207.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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