Internal Information systems, Competitors, Valuation

Responsibility accounting, Performance evaluation, Principle-agent model, Compensation

Stanley Baiman, Robert E. Verrecchia, The Relation Among Capital Markets, Financial Disclosure, Production Efficiency, and Insider Trading, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 1-22

Stanley Baiman, Barry L. Lewis, An Experiment Testing the Behavioral Equivalence of Strategically Equivalent Employment Contracts, Journal of Accounting Research, Vol. 27, No. 1 (Spring, 1989), pp. 1-20

Performance evaluation systems, Control system, Investigation region, Moral hazard

Management control system, Agency model, Private information

Auditing, Contracting, Principle-agent model, Moral hazard

An important characteristic of any buyer‐supplier relationship is the amount and type of information that is exchanged between the contracting parties. Buyer‐supplier networks are characterized by greater information exchange than arm’s‐length transactions. This enhanced information exchange allows for greater production efficiency but increases the potential for information misappropriation. In this paper we characterize the set of innovations for which each of these forms of exchange relationships is efficient. We then explore the effect of an initial information linkage between the buyer and supplier. Such linkages increase the set of innovations for which networks are efficient. However, such linkages have a negative effect on the buyer’s incentive to innovate and an ambiguous effect on the supplier’s incentive to invest in flexible production techniques. Finally, we identify settings in which the buyer‐supplier surplus is greater with such linkages.

Capital investment decisions, Centralized organization, Delegation, Shared responsibility

Auditing, Collusion, Principle-agent model