Accrual Accounting and Resource Allocation: A General Equilibrium Analysis

69 Pages Posted: 8 Jun 2017 Last revised: 3 Aug 2017

Jung Ho Choi

Stanford Graduate School of Business

Date Written: July 2017

Abstract

I evaluate the role of accrual accounting in improving firms' production decisions and resource allocation across firms. I introduce both cash flow and accounting earnings as imperfect measures of performance into a general equilibrium model with heterogeneous firms under imperfect information. The model demonstrates firms’ more informed decisions with an improved measure of performance lead to more resources being allocated to potentially high-productivity firms through the product and input markets. The estimated parameter values are consistent with accrual accounting improving managers' information about future productivity by providing a better measure of performance. The quantitative analysis suggests having accrual accounting information in addition to cash accounting information leads to a 0.7% increase in aggregate productivity and a 1.0% increase in aggregate output through resource allocation in the United States. The estimates are larger in China and India as benchmarks for developing countries: a 1.2%-2.5% increase in aggregate productivity and a 1.7%-3.8% increase in aggregate output. Overall, I demonstrate accrual accounting plays an important role in determining aggregate productivity through resource allocation.

Keywords: accrual accounting, resource allocation, productivity, imperfect information

JEL Classification: M41, O11, O47

Suggested Citation

Choi, Jung Ho, Accrual Accounting and Resource Allocation: A General Equilibrium Analysis (July 2017). Available at SSRN: https://ssrn.com/abstract=2977082

Jung Ho Choi (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-721-8434 (Phone)

Paper statistics

Downloads
66
Abstract Views
130