Stability and Regime Change: The Evolution of Accounting Standards
41 Pages Posted: 31 Oct 2017 Last revised: 16 Sep 2018
Date Written: April 27, 2018
We regard accounting regulation as a politico-economic institution and analyze its evolution in a dynamic voting model. We show that, as long as the society sufficiently cares about the future, zero disclosure is never an equilibrium. Further, accounting regimes are intrinsically persistent with self-regenerating interest groups. While a high disclosure regime is immediately stable, a low-disclosure regime also settles into a steady state after some rounds of adjustment. Moreover, we show that a high-disclosure regime is robust to deviation, as no interest group has incentives to change. In a low-disclosure regime, however, the economy can initiate a transition by coordinating on a future high disclosure quality. This transition will be supported by even unsuccessful businesses, whose control of the economy resulted in the status quo in the first place. These results are consistent with the observed development of accounting regulation. Perhaps most importantly, we show that accounting policy tends to evolve in the direction of higher efficiency.
Keywords: Accounting standards, political economy, dynamic voting
JEL Classification: D72, K22, M41, M48
Suggested Citation: Suggested Citation