Second-Order Uncertainty in Accounting Information and Bilateral Bargaining Costs

Posted: 18 Jul 1998

See all articles by Susan F. Haka

Susan F. Haka

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Joan L. Luft

Michigan State University - Department of Accounting & Information Systems

Brian Ballou

Miami University of Ohio - Department of Accountancy

Abstract

Efficient contracting involves reducing the losses in wealth due to bargaining impasses, time and effort spent in negotiating, delays in implementing profitable projects, and second-best agreements. Properties of accounting systems play a significant role when bargainers haggle over accounting-based payoffs. This paper shows that bilateral bargaining requires more time and generates more reported subjective disutility when the accounting information used in contracting creates greater uncertainty about payoffs. We develop an argument linking accounting-based common uncertainty to the information asymmetry about bargainers' payoffs that drives bargaining costs. We also distinguish between two kinds of uncertainty: first-order uncertainty or simple risk (uncertainty about outcomes) and second-order uncertainty (uncertainty about probability distributions of outcomes). In an experimental setting, we show that the presence of second-order uncertainty increases bargaining costs, holding first-order uncertainty constant at a moderately high level. We also find that bargainers whose payoffs are affected by second-order uncertainty demand and receive a higher premium than bargainers whose payoffs are affected by simple risk only.

JEL Classification: D80, D23, L14, L15, M40, M46

Suggested Citation

Haka, Susan F. and Luft, Joan and Ballou, Brian J., Second-Order Uncertainty in Accounting Information and Bilateral Bargaining Costs. Available at SSRN: https://ssrn.com/abstract=103121

Susan F. Haka (Contact Author)

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2920 (Phone)
517-432-1101 (Fax)

Joan Luft

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-2917 (Phone)
517-432-1101 (Fax)

Brian J. Ballou

Miami University of Ohio - Department of Accountancy ( email )

310 Laws Hall
Oxford, OH 45056-1675
United States

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