Optimal Cost Targets and Incentives for Acquiring Expertise
University of Pennsylvania - Accounting Department
Madhav V. Rajan
Stanford Graduate School of Business
Review of Accounting Studies, Vol 3, 1998
This paper studies the optimal choice of cost standards (or cost targets) over time in an agency setting in which a worker is responsible for both implementing actions and acquiring skill/expertise that would enable him to improve his future performance with respect to those actions. We characterize the effect of the decision horizon and the observability of the worker's acquired expertise on both the optimal path of cost standards and the worker's investments in expertise. In addition, we characterize the trade-off between motivating the worker's investment in expertise and motivating his efficient use of the expertise.
JEL Classification: M40, M46Accepted Paper Series
Date posted: April 27, 1999
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