The employment relationship with employees' ability and their actions both private information (thus combining adverse selection with moral hazard) is modeled as a repeated game with self-enforcing contracts being perfect Bayesian Nash equilibria. Under termination contracts, the equilibrium contract structure consists of a hierarchy of ranks, finite in number even though ability is continuous. Reputation acts as an effective device for worker discipline without the need for involuntary unemployment. Selection by bonding is not, in general, incentive compatible, but selection by promotion of employees through the ranks is. Many other features correspond to observed employment structures.

Abstract The perceived limitations of historical cost net income for assessing the relative performance of oil and gas firms led the SEC and FASB to issue a series of pronouncements requiring disclosure of current value reserve-based information to supplement the information contained in the primary financial statements. This study examines whether historical cost earnings of oil and gas companies possess information in the sense of explaining cross-sectional differences in firm security returns. Additionally, we examine whether various Reserve Recognition Accounting-based measures possess incremental information relative to historical cost earnings measurements. The results indicate that for the sample period 1979-1981, historical cost earnings as well as reserve-based measures constructed from RRA data contain information relevant to valuing oil and gas firms. However, these results deteriorate for the sample period 1982-1984 where reserve-based measures are constructed from SFAS No. 69 data. The weaker relations in the latter period are consistent with the findings of Miller and Upton [1985b] and Magliolo [1986] and are attributed to the relative stability of oil prices during this time frame which results in a lower "signal-to-noise" ratio for the various reserve-based measurements.

Abstract The economic theory of the firm suggests that a profit-maximizing product price may be determined by equating marginal cost and marginal revenue. Yet recent surveys suggest that most firms use cost-based pricing strategies where product costs are determined using absorption costing. Lere [1986] has drawn upon the economic theory of the firm, as well as extensive work on heuristic decision processes, to develop an empirically testable theory of product pricing based on accounting costs. This paper reports the results of an experiment in which Lere's theory was empirically tested.