Journal article
The contracting value of tainted reports in cost reduction settings
European economic review, Vol.49(8), pp.1979-1985
11/01/2005
DOI: 10.1016/j.euroecorev.2004.10.002
Abstract
While cost accounting is a well-developed discipline with a rich institutional past, it is criticized for being manipulable. This criticism is due, in part, to the existence of
multiple, yet
equally accepted cost allocation procedures or cost estimation techniques. Employing a principal–agent model, cost accounting is modeled as a menu of alternative methods which, conditional on agent effort, produce noisy, unbiased and independently distributed (i.e., equally defensible) measures from which a single realization is selected ex post as the report used to contract with the agent. Assuming that the report does not indicate which method produced it, the report modeled is “tainted” in that the lowest (most favorable to the agent) outcome is reported, where the “amount” of tainting corresponds to the menu's size. The paper identifies bright-line conditions where the principal's expected net payoff is independent of the amount of tainting, demonstrating that tainting does not
necessarily affect the report's incentive value.
Details
- Title: Subtitle
- The contracting value of tainted reports in cost reduction settings
- Creators
- Mark Penno - University of Iowa
- Resource Type
- Journal article
- Publication Details
- European economic review, Vol.49(8), pp.1979-1985
- DOI
- 10.1016/j.euroecorev.2004.10.002
- ISSN
- 0014-2921
- eISSN
- 1873-572X
- Publisher
- Elsevier B.V
- Number of pages
- 7
- Language
- English
- Date published
- 11/01/2005
- Academic Unit
- Accounting
- Record Identifier
- 9984963222002771
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