Dynamic Incentives and Responsibility Accounting

37 Pages Posted: 8 Apr 1998

See all articles by Raffi Indjejikian

Raffi Indjejikian

University of Michigan at Ann Arbor - Accounting

Dhananjay Nanda

University of Miami - Department of Accounting

Date Written: March 1998

Abstract

In dynamic principal-agent relationships, unless a principal can precommit to a multiperiod contract, incentives are affected by a problem known as the ratchet effect. We present a two period agency model to show that the use of more aggregate performance measures and greater consolidation of responsibility helps mitigate the ratchet effect. For example, an aggregate measure may be preferred to a set of disaggregate measures to avoid aggravating the ratchet effect. Similarly, it may be preferable to consolidate responsibility for two activities in the hands of one agent despite the potential loss of performance evaluation information implied by consolidation.

JEL Classification: J23, L22, M41, M46

Suggested Citation

Indjejikian, Raffi J. and Nanda, Dhananjay, Dynamic Incentives and Responsibility Accounting (March 1998). Available at SSRN: https://ssrn.com/abstract=74368 or http://dx.doi.org/10.2139/ssrn.74368

Raffi J. Indjejikian

University of Michigan at Ann Arbor - Accounting ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Dhananjay Nanda (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

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