Contracting Theory and Accounting
Richard A. Lambert
University of Pennsylvania - Accounting Department
JAE Rochester Conference April 2000
This paper reviews agency theory and its application to accounting issues. I discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems. I review theoretical research on the role of performance measures in compensation contracts, and I compare how information is aggregated for compensation purposes versus valuation purposes. I also review the literature on communication, including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place. The paper also discusses capital allocation within firms, including transfer pricing and cost allocation problems.
Number of Pages in PDF File: 135
JEL Classification: D82, D23, J33, M41, M46, L29
Date posted: January 17, 2001