Dynamic incentives and dual-purpose accounting

Gerald Feltham, Raffi Indjejikian, Dhananjay Nanda

Research output: Contribution to journalArticle

15 Scopus citations

Abstract

Ongoing employment relationships often give rise to implicit, dynamic incentives. We describe the implications of implicit incentives when firms use information about both an employee's past performance and his future productivity in a two-period agency model. We show that when an accounting system serves these dual objectives, an employee's implicit incentives may be beneficial or detrimental to the firm. As a consequence, firms may prefer an accounting system that reports a single metric that combines information about past performance and future productivity, over one that reports two distinct metrics, one for each purpose.

Original languageEnglish (US)
Pages (from-to)417-437
Number of pages21
JournalJournal of Accounting and Economics
Volume42
Issue number3
DOIs
StatePublished - Dec 1 2006
Externally publishedYes

Keywords

  • Accounting measures
  • Incentives
  • Multi-period

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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