The Economic Trade-Offs in the Fair Value Debate

35 Pages Posted: 2 Oct 2009 Last revised: 27 Mar 2010

See all articles by Haresh Sapra

Haresh Sapra

Booth School of Business, University of Chicago

Date Written: March 19, 2010


In this paper, I provide two general insights that are useful in evaluating the economic trade-offs of alternative accounting measurement rules. First, when there are multiple imperfections in the world, restricting a strict subset of it need not always improve welfare. Second, a firm is not a black box that operates independently of the measurement environment. Measuring a firm’s operations affects the firm’s actions which, in turn, affect the underlying distribution of cash flows that is being measured.

Using these two insights, I discuss the economic consequences of accounting measurement rules that strive for greater transparency. In particular, I focus on the costs and benefits of fair value accounting and its implications for financial stability.

Keywords: Amplification Mechanism, Fair Value Accounting, Financial Stability, Historical Cost Accounting

JEL Classification: D52, G12, G21, G22, M41

Suggested Citation

Sapra, Haresh, The Economic Trade-Offs in the Fair Value Debate (March 19, 2010). Chicago Booth Research Paper No. 09-35, Available at SSRN: or

Haresh Sapra (Contact Author)

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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