Current corporate disclosures regarding carbon emissions lack generally accepted accounting rules. The transactional carbon accounting system described here takes the rules of historical cost accounting for operating assets as a template for generating carbon emissions (CE) statements comprising a balance sheet and a flow statement. The asset side of the CE balance sheet reports the carbon emissions embodied in operating assets. The liability side conveys the firm’s cumulative direct emissions into the atmosphere as well as the cumulative emissions embodied in goods acquired from suppliers less those sold to customers. Flow statements report the company’s annual corporate carbon footprint calculated as the cradle-to-gate carbon footprint of goods sold during the current period. Taken together, balance sheets and flow statements generate key performance indicators of a company’s past, current, and future performance in the domain of carbon emissions.

This paper analyzes a principal-agent model in which the agent (manager) can exert effort in every period in order to gain access to some investment opportunity. He or she then decides whether the firm undertakes the opportunity. My analysis focuses on satisfactory incentive schemes which motivate the manager to exert effort and to invest in all profitable projects. As a consequence, the principal's gross benefit is held fixed, and the variable of interest is the resulting agency cost, i.e., the present value of all compensation payments to the manager. The manager's compensation payments are based on a performance measure chosen by the principal. My analysis compares performance measures based only on realized cash flows with the residual income performance measure. I assume that the calculation of residual income is based on depreciation charges which reflect the useful life of assets as well as the intertemporal distribution of cash flows generated by those assets. For suitably chosen depreciation charges, residual income reflects at each point in time the value currently created by the manager.

[In recent years, the agency paradigm has become central to theoretical research in managerial accounting. Empirical research in the area of executive compensation has tested the consistency of agency model predictions with observed compensation data. However, it seems difficult to trace specific instances where results and insights obtained from agency models have affected actual management practice. This article describes one such instance in the context of government contracting, showing how agency theory was used to design incentive contracts. The research reported here was initiated by the German Department of Defense (GDOD). The Department commissioned a study to examine the applicability of a class of incentive schemes subsequently referred to as budgeted-based schemes. To implement these schemes, the GDOD expressed interest in a constructive procedure that would derive suitable budget-based schemes for specific procurement projects. I describe such a procedure and discuss a number of institutional factors that affected the way the budget-based schemes were applied to two pilot projects in Germany. Traditionally, government contracts under sole-source conditions have been awarded either as fixed-price or cost-plus contracts. The use of fixed-price contracts has been confined to projects with relatively few technological and economic uncertainties. With such uncertainties, fixed-price contracts are unattractive from a risk-sharing perspective. Yet, even with a risk-neutral contractor (because of size and diversification) governments are typically reluctant to sign fixed-price contracts when there are major informational asymmetries. If the government is relatively ignorant about inputs and resources required for the project, it will have difficulties disputing the firm's ex ante cost calculation. As a consequence, the firm earns an informational rent; that is, the firm will extract a higher price than it would have if the government had shared the firm's knowledge and expertise. Cost-plus contracts avoid the problem of overpayment, but, as has been well documented, the government subjects itself to the problem of cost padding. To limit the negative incentives of cost-plus contracts, it has become common practice in the United States to replace standard cost-plus contracts with cost-plus-fixed-fee contracts, so that the firm's profit allowance is fixed rather than being proportional to actual project costs. In recent years, there has been an increasing trend in the United States to provide positive incentives for cost control by using cost-plus-incentive-fee contracts. At the outset of a project, the parties negotiate a cost target, and the firm's profit increases proportionally with cost underruns relative to the cost target. Conversely, the incentive profit decreases at the same rate with cost overruns. In effect, the firm thus bears a share of actual project costs. A recent survey by the U.S. General Accounting Office (GAO 1987) shows that for the period 1978-84 firms' cost-share parameters typically varied between 15 and 25 percent, but were as high as 50 percent in unusual cases. A major concern voiced repeatedly in connection with cost-plus-incentive-fee contracts is that the government is unable to formulate realistic cost targets for many projects. If the target is set unrealistically low, the firm is likely to suffer a financial penalty. Conversely, an unrealistically high cost target leads to additional "undeserved" profits. For this reason, the GAO states that cost-plus-incentive-fee contracts are confined to procurement projects where "the government has a sound basis to estimate contract costs, but where uncertainties exist that make a fixed-price contract impractical" (GAO 1987, 1). The relatively low cost-share parameters currently used (15 to 25 percent) may reflect the government's desire to mitigate the effects of unrealistic cost targets. The budget-based schemes considered in this study can be viewed as a refinement of cost-plus-incentive-fee contracts. In addition to actual cost, the incentive fee now depends as well on a cost estimate that the firm submits, typically at the start of the project. In effect, the firm selects a budget (target cost), and the incentive profit is proportional to the budget variance. Previous modeling analysis has shown that the budget-based schemes create desirable reporting and performance incentives (see Kirby et al. 1991). The government receives information that is useful for its budget planning process, since the contracting firm is induced to submit an unbiased cost estimate. Specifically, the firm has an incentive to reveal truthfully its own assessment of expected project costs. To some extent, the budget-based schemes therefore avoid the issue faced by cost-plus-incentive-fee contracts described above. Instead of having the government formulate a realistic cost target, this task is now left to the better informed firm. From a cost-control perspective, the budget-based schemes have been shown to be optimal incentive mechanisms. By offering a menu of contracts, the government can tailor performance incentives to the firm's privately observed cost information. Specifically, the firm chooses a high target profit in return for a high cost-share parameter, provided its cost information is relatively favorable. A high cost-share parameter will induce the firm to conduct the project in a more efficient way. The resulting cost savings are effectively split since the firm receives a large incentive profit. As a consequence, both sides will be better off.]

Describes the effect of agency models on actual management in the context of government contracting in Germany. Construction of incentive contracts; Design and application of budget-based schemes; Advantages of incentive schemes.

This paper is concerned with the amount of communication that must be provided to implement a performance standard by a mechanism whose stationary messages have the Nash property. In p articular, the authors study implementation of Walrasian allocations in exchange environments. They show that the smallest message space t hat implements Walrasian allo-cations is one of dimension, roughly, n E (. 1 1)& ./(n 1 1), where . is the number of commodities and n the number of agents. The authors exhibit an implementing mechanism whos e message space has that dimension.

Decision making, Centralized decision making, Delegated decision making, Value of communication

[In our model of negotiated transfer pricing, divisional managers can make specific investments that enhance the value of intrafirm trade. However, these investments are irreversible and must be made before divisional managers have enough information to determine the desired intrafirm transfer. We find that a system of negotiated transfer pricing will lead to efficient outcomes provided the divisions can sign fixed-price contracts prior to making their investment decisions. While these contracts are likely to be renegotiated after the relevant information becomes known, they nonetheless provide the divisions with effective protection for their specific investments.]

Analyzes a system of negotiated transfer pricing in which divisions can agree on a simple fixed-price contract and renegotiate this contract on arrival of better information. Provision of effective protection for their specific investments.

In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after information about the desirability of trade is revealed. We find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages. Moreover, specific performance can induce both parties to invest efficiently if a separability condition holds. Expectation damages, on the other hand, is poorly suited to solve bilateral investment problems.