Optimal Cost Targets and Incentives for Acquiring Expertise

Posted: 27 Apr 1999

See all articles by Stanley Baiman

Stanley Baiman

University of Pennsylvania - Accounting Department

Madhav V. Rajan

Booth School of Business, University of Chicago

Abstract

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, M46

Suggested Citation

Baiman, Stanley and Rajan, Madhav V., Optimal Cost Targets and Incentives for Acquiring Expertise. Review of Accounting Studies, Vol 3, 1998. Available at SSRN: https://ssrn.com/abstract=159010

Stanley Baiman (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6782 (Phone)
215-573-2054 (Fax)

Madhav V. Rajan

Booth School of Business, University of Chicago

1101 East 58th Street
Chicago, IL 60637-1561
United States

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