Discusses a link between two conflicting approaches to accounting theory. Proper income measurement or asset evaluation; Information disclosure; Corporate income measurement in the two approaches; Divergence of accounting value and economic value.

How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment by Tracy R. Lewis and David E. M. Sappington. Published in volume 91, issue 3, pages 724-730 of American Economic Review, June 2001

The authors examine a firm's decision either to produce an essential input itself or to hire a subcontractor to produce the input. The authors focus on how this decision is affected by technological change in the industry. In general, cost-reducing technological change leads the firm to produce the input itself more often. The firm's calculus is shown to depend on whether the subcontractor's skills are idiosyncratic or transferable. In the latter case, technological progress can even be detrimental to the firm and to society as a whole.

In many countries throughout the world, regulators are struggling to determine whether and how to introduce competition into regulated industries. This essay examines the complexities involved in the liberalization process. While stressing the importance of case-specific analyses, this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies.

We analyze the optimal behavior of an organization when its employees can manipulate the organization's accounting system to their private advantage. We find that the organization may benefit by helping its employees manipulate the system. This help can reduce the employees' private returns from devoting effort to further manipulation of the accounting system, which reduces the cost of motivating the employees to devote their effort to improving the real (rather than the measured) performance of the organization.

We examine the optimal design of a risk‐adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection), and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first‐best level, (2) higher‐quality banks have larger asset bases and face lower capital adequacy requirements than lower‐quality banks, and (3) the probability of failure is equated across banks.

We examine the design of asset revaluation policies in settings where a regulator can mandate fair value disclosure in order to mitigate a lemons problem in the asset resale market. The welfare-maximizing policy generally prescribes fair value certification for the lower asset values and (less costly) historical cost reporting for the higher asset values. The potential for voluntary certification can reduce welfare by increasing equilibrium certification costs and promoting underinvestment in socially valuable projects. Thus, a single regulated source of information (mandated disclosure) can be preferable to two sources of information (mandated and voluntary disclosure).