Dynamic incentives and responsibility accounting

Raffi Indjejikian, Dhananjay Nanda

Research output: Contribution to journalArticlepeer-review

76 Scopus citations


In dynamic principal-agent relationships, unless a principal can commit to a multiperiod contract, incentives are affected by a problem known as the ratchet effect. We present a two-period agency model to show that the use of more aggregate performance measures and greater consolidation of responsibility helps mitigate the ratchet effect. For example, an aggregate measure may be preferred to a set of disaggregate measures to avoid aggravating the ratchet effect. Similarly, it may be preferable to consolidate responsibility for two activities in the hands of one agent despite the potential loss of performance evaluation information implied by consolidation.

Original languageEnglish (US)
Pages (from-to)177-201
Number of pages25
JournalJournal of Accounting and Economics
Issue number2
StatePublished - Apr 1999
Externally publishedYes


  • Decentralization
  • Incentives
  • J33
  • L22
  • M41
  • Performance measurement
  • Ratchet effect

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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