An Empirical Analysis of the Incentive-Action-Performance Chain of the Principal-Agent Model

Posted: 18 Apr 2008 Last revised: 16 Oct 2008

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Mindy Morel

University of Toronto - Joseph L. Rotman School of Management

Christina Fader

University of Waterloo - Department of Economics

Date Written: 2008

Abstract

This study empirically investigates the incentive-action-performance chain on cross-sectional plant data in the context of a Just-in-time (JIT) plant manufacturing environment. Incentives in this study are of the soft goal-oriented variety rather than direct compensation. The empirical analysis is implemented using Ordinary Least Squares and Heckman two-stage regressions to account for the potential endogeneity of the JIT adoption decision. We find that plant performance outcomes are associated with actions, namely, the breadth and intensities of plant JIT practices adopted by plant management, but are not associated with performance incentives. However, we find that the JIT adoption decision is associated with incentives. We further find that it is the essential inventory incentive aspects of JIT, such as increasing inventory turns and reducing scrap/waste, that motivate JIT adoption rather than other arguably less central incentive aspects of JIT such as product quality. Overall, our results are consistent with the predictions of the implicit career incentives Principal-Agent model but not with predictions of the standard explicit incentives Principal-Agent model.

Keywords: principle-agent, just-in-time manufacturing, career incentives, endogeneity

JEL Classification: D29, D82, M40, M46

Suggested Citation

Callen, Jeffrey L. and Morel, Mindy and Fader, Christina, An Empirical Analysis of the Incentive-Action-Performance Chain of the Principal-Agent Model (2008). Journal of Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1121327

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Mindy Morel

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-971-3048 (Phone)

Christina Fader

University of Waterloo - Department of Economics ( email )

Waterloo, Ontario N2L 3G1
Canada

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