Endogenous Performance Smoothing

Abstract:     
A model of endogenous performance smoothing is presented and analyzed. A manager, or agent, labors across two periods, where output in each period is a Bernoulli process with an evident revenue recognition interpretation. Smoothing may be possible, and this possibility may be linked to the manager's supply of inputs subject to moral hazard. If so, the efficient contract design motivates smoothing. Less information is conveyed to the principal for valuation purposes, simply because doing so lessens the moral hazard problem.

JEL Classification: M41

working papers series