[The information furnished by management accounting systems aids top management in assessing the performance of lower levels and in setting proper incentives. These systems also provide information to lower levels which aids them in making operational decisions. Typically, detailed information is provided to lower levels in the organization, while only a summary of this information is furnished to top management. Therefore, in designing a management accounting system, a question arises as to the welfare effect of giving an employee access to detailed information, on which he can base his decisions, when such (detailed) information cannot be used in evaluating his performance. More generally, the question arises as to the welfare effects of increasing the informational asymmetry between upper and lower management by improving lower management's private pre-decision information system. Answering the above question can provide important insights into the proper design of firms' management accounting systems. We examine this issue using the principal-agent framework. In any given period, information reported in the managerial accounting system may be pre-decision or post-decision. When the system reports post-decision information and the contracts are complete, it is clear that the value of such information is non-negative. The value of pre-decision information is more difficult to assess. An agent who has access to better pre-decision information is able to use that information to make better decisions, given his objectives. However, the agent's objectives and the principal's objectives need not be the same. For example, the agent may use his better pre-decision information system to more successfully shirk on the job, making the principal strictly worse off. Thus, the principal is not necessarily better off by improving the agent's pre-decision information system. One way in which the principal can mitigate any negative effects of improving the agent's private pre-decision information system is to require the agent to communicate the private information. In this paper, we ignore the possibility of such communication. The reason for this is, as noted earlier, while large amounts of detailed information are provided to individuals at lower levels of the firm, only a small amount of that information is ever communicated to higher levels of the firm. Therefore, we view ignoring communication as an approximation. We examine a principal-agent model in which the principal can influence the extent to which the agent has superior private information on which the latter can base his action choice. We find sufficient conditions under which a strict Pareto improvement results from improving the agent's private pre-decision information system. This result arises because improving the agent's private pre-decision information system leads to improved coordination between the agent's information signal and action choice, which, in turn, results in an increase in the agent's average productivity. Although we do not find sufficient conditions under which a strict negative value might arise, we discuss some possible reasons and illustrate them with examples.]

Examines a principal-agent model in which the principal can influence the extent to which the agent has superior private information on which the latter can base his action choice. Relevance of information furnished by management accounting systems in the assessment of employees; Conditions for the improvement of the agent's private pre-decision information system.

[This paper explores a possible explanation for the observed use of bonus pool arrangements. Under fairly general conditions, the use of a bonus pool arrangement results in a strict Pareto improvement by enabling an owner to exploit non-contractible information, that might otherwise not be used, to motivate agents. We characterize the optimal bonus pool arrangement and analyze the interdependencies which it induces between agents. Our results demonstrate the manner in which the use of non-contractible information via bonus pool schemes distorts the payoffs to agents relative to the case in which the non-contractible information is not used.]

[In the usual agency analysis of moral hazard, the principal is endowed with a production process and must hire an agent to manage it. Output depends on the agent's effort, the production process supplied by the principal, and some random state realization. A common assumption is that the output of the production process is costlessly observable and sufficiently informative about the agent's effort to warrant using it for contracting. However, this assumption may not be descriptive of a large number of settings. In fact, it is hard to conceive of many production settings in which the gathering and reporting of any information is totally free and independent of costly design decisions. For example, if the agent produces some product, it is not costless to monitor the number or the quality of the units produced; someone must be paid or a machine must be purchased to do so. In addition, some opportunity cost may have to be incurred to rearrange the production process to facilitate the assessment of the agent's work. In this article, we consider the implications of relaxing the assumption that output is costlessly observable and contractible, by analyzing the optimal design of a costly unconditional monitoring system. We characterize the monitoring system in terms of the Type I error associated with the obedient action and the Type II errors associated with the disobedient actions. We find that it is always optimal to design the monitoring system such that the Type I error is smaller than the Type II error for any disobedient action. Further, we find that as the costliness of the monitoring system increases, the Type I error increases monotonically, while the Type II error initially decreases and then increases.]

We investigate how nonfinancial performance measures (NPMs) can be used to encourage cooperation across divisions. The implementation of a project often requires joint efforts by multiple divisions. However, privately informed division managers sometimes find it in their self-interest to forgo profitable joint projects or to underinvest in relationship-specific assets. By treating the implementation of a joint project (e.g., a major process improvement or new product development) as an NPM, we show that paying the division managers discrete bonuses tied to this NPM improves the efficiency of project implementation and upfront investments. We derive how the optimal implementation bonus trades off distortions in ex post implementation and ex ante investments. In a dynamic version of the base model with learning-by-doing, we show that conditional on a project being implemented early on, the implementation bonus in subsequent periods will be higher than if the earlier project had not been implemented.

Explores a possible explanation for the observed use of bonus pool arrangements. Model illustrating optimal bonus arrangement; Use of non-contractible information.

Analyzes the design of an unconditional monitoring system in agencies. Value of monitoring; Characterization of monitoring system in terms of error associated with the obedient and disobedient actions; Optimal design of the costly unconditional monitoring system.

Previous research in management accounting and economics has noted the potential for complementarities between the firm’s performance measurement system and its other organizational design choices. We add to this literature by studying how the informativeness and incentive properties of a performance metric can be influenced by one particular organizational design choice—the size of the firm’s inventory buffers. We model a manufacturing setting in which an agent manages a workstation that processes intermediate units. As intermediate units arrive, they are stored in an inventory buffer until the agent can process them. The buffer can hold a maximum number of intermediate units—its buffer size. The agent is compensated on the basis of his workstation’s throughput. We characterize the conditions under which reducing the inventory buffer enhances/degrades the informativeness of the performance metric and, hence, mitigates/exacerbates the agent’s incentive problem.