Performance Measurement in Multi-Period Agencies
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.
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Volume (Year): 155 (1999)
Issue (Month): 1 (March)
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