Dynamic Incentives and Responsibility Accounting: A Comment

Journal of Accounting & Economics, Aug 2003, Volume: 35 Issue: 3 pp.423-441

University of Alberta School of Business Research Paper No. 2013-1096

Posted: 2 Jul 2013

See all articles by Peter O. Christensen

Peter O. Christensen

Copenhagen Business School - Department of Finance

Gerald A. Feltham

University of British Columbia

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: June 1, 2002

Abstract

Revisits the finding of a ratchet effect causing losses through lack of commitment by managers through their contracts by Indjejikian and Narda (1999). Demonstrates that equilibrium can be achieved by assuming the principal can commit in advance to offer a fair second-period contract and the agent can commit to stay for that period. Shows that the principal, by committing to seasonal period incentive rates in advance and to a fair fixed wage, can achieve full efforts from agents. Assumes that principals can offer a long-term contract which is ratchet-proof if no renegation takes place. Concludes that the principal's ability, or not, to commit to a second-period incentive rate in advance, is important, since it ties in the agent for a second period.

Keywords: Agency Theory, Contracts, Incentives, USA

Suggested Citation

Christensen, Peter Ove and Feltham, Gerald A. and Sabac, Florin, Dynamic Incentives and Responsibility Accounting: A Comment (June 1, 2002). Journal of Accounting & Economics, Aug 2003, Volume: 35 Issue: 3 pp.423-441 , University of Alberta School of Business Research Paper No. 2013-1096, Available at SSRN: https://ssrn.com/abstract=2283392

Peter Ove Christensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark
+45 6140 3237 (Phone)

Gerald A. Feltham

University of British Columbia ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8397 (Phone)
604-822-9470 (Fax)

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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