In this article, I study the interaction between cost accounting systems and pricing decisions in a setting where a monopolist sells a base product and related support services to customers whose preference for support services is known only to them. I consider two pricing mechanisms—activity‐based pricing (ABP) and traditional pricing—and two cost‐accounting systems—activity‐based costing (ABC) and traditional costing, for support services. Under traditional pricing, only the base product is priced, whereas support services are provided free because detailed cost‐driver volume information on the consumption of support services by each customer is unavailable. Under ABP, customers pay based on the quantities consumed of both the base product and the support services because detailed cost‐driver volume information is available for each customer. Likewise, under traditional costing for support services the firm makes pricing decisions on cost signals that are noisier than they are under ABC. I compare the equilibrium quantities of the base product and support services sold, the information rent paid to the customers, and the expected profits of the monopolist under all four combinations of cost‐driver volume and cost‐driver rate information. I show that ABP helps reduce control problems, such as moral hazard and adverse selection problems, for the supplier and increases the supplier's ability to engage in price discrimination. I show that firms are more likely to adopt ABP when their customer base is more diverse, their customer support costs are more uncertain, their costing system has lower measurement error, and the variable costs of providing customer support are higher. Firms adopt ABC when their cost‐driver rates for support services under traditional costing are noisier measures of actual costs relative to their cost‐driver rates under ABC and when the actual costs of support services are inherently uncertain. I also show that cost‐driver rate information and cost‐driver volume information for support services are complements. Although the prior literature views ABC and activity‐based management (ABM) as facilitating better decision making, I show that ABC and ABP (a form of ABM) are useful tools for addressing control problems in supply chains.

Auditing, Auditor litigation, Rule 10b-5, Auditor liability

Two trade-offs arise in an agency relationship when the same accounting signal is used for both performance evaluation and investment evaluation. Using the signal for performance evaluation, (1) directly influences the informativeness of the signal for investment evaluation, (2) induces manipulation, which, in turn, lowers the informativeness of the signal for investment evaluation. The principal can increase her welfare by delegating the investment decision to the agent, setting up multiple control systems, or using the outcome of the investment for performance evaluation. We show the implications of using each alternative on incentive contracts, equilibrium effort, and manipulation levels.

We conduct a field experiment, based on a registered report accepted by the Journal of Accounting Research , to test performance effects of setting a high reference point for peer‐performance comparison. Relative to providing the median as a reference point for online students to compare themselves to, providing the top quartile: damps performance for those below the median, boosts performance for those between the median and top quartile, and, in the case of outcome but not process comparison, boosts performance for those above the top quartile. We do not find that either reference point yields a greater average performance effect. However, providing the more effective reference point in each partition of initial performance yields a 40% greater performance effect than providing either reference point uniformly. Students access the online courses intermittently over the span of a year. Our effects derive from small portions of our treatment groups—5% in the case of process comparison and 26% in the case of outcome comparison—who accessed treatment and who were, on average, more active leading up to and during our intervention.

There is a budget‐balancing constraint in a single‐period partnership game that creates a severe moral hazard problem. Compared to an agency setting, the presence of this constraint makes the provision of penalties and rewards more difficult in a partnership. Due to the nature of professions, it is difficult to observe individual partners' output, and monitoring their effort is expensive. Hence, compensation cannot be tied exclusively to individual partners' effort or output. The bigger the size of the partnership, the tighter the budget‐balancing constraint becomes. Hence, the moral hazard problem created by the budget‐balancing constraint is likely to be particularly acute in large accounting partnerships. In spite of the reasons mentioned above, partnerships are not devoid of incentives. Even if signals on the efforts of individual partners are unavailable, the threat of shirking by other partners will ensure that partners work hard. The equilibrium sustained by the threat of shirking, though plausible, is unappealing. In an auditing setting, shirking to punish other partners may involve personal criminal liability and may not be a credible threat. If, however, costly signals of individual partners' efforts are available, then expulsion threats can be used to discipline behavior. The lessons we learn from a repeated partnership game are very different from those of a single‐period partnership game. The repetition helps to loosen the budget‐balancing constraint and to correlate reward with output. The threat of noncooperation in future periods or the threat of expulsion from future periods helps align incentives. This cannot be achieved in a single‐period game. Résumé. Il existe, dans un jeu à période unique mettant en situation une société de personnes, une contrainte relative à l'équilibre budgétaire qui soulève un problème sérieux de risque moral. Si l'on compare cette situation à celle de la relation mandant‐mandataire, la présence de cette contrainte rend plus difficile l'instauration de pénalités et de récompenses dans une société de personnes. Compte tenu de la nature des professions en cause, il est difficile de constater ce que produit chacun des associés, et contrôler l'intensité de leurs efforts est onéreux. Ainsi, la rémunération ne peut être liée exclusivement à l'effort ou au rendement des différents associés. Plus grande est l'envergure de la société de personnes, plus la contrainte de l'équilibre budgétaire se resserre. Par conséquent, le problème de risque moral créé par cette contrainte est susceptible d'être particulièrement aigu dans les grands cabinets comptables. Malgré les faits évoqués ci‐dessus, les sociétés de personnes ne sont pas dépourvues d'incitatifs. Même s'il est impossible de recueillir des indices relatifs aux efforts des différents associés, la menace d'esquive de la part des autres associés incitera chacun des associés à mettre de l'ardeur au travail. l'équilibre maintenu grâce à la menace d'esquive,' bien qu'il soit plausible, rebute. Dans un contexte de vérification, l'esquive utilisée comme mesure de rétorsion à l'égard d'autres associés peut engager la responsabilité criminelle personnelle et risque de ne pas constituer une menace crédible. S'il est possible, toutefois, d'instaurer les mécanismes onéreux qui permettent d'évaluer l'intensité des efforts des différents associés, la menace d'expulsion peut alors être évoquée pour discipliner le comportement. Les conclusions que tirent les auteurs d'un jeu à périodes multiples mettant en situation une société de personnes sont très différentes de celles qu'ils tirent du jeu à période unique. La répétition contribue au relâchement de la contrainte de l'équilibre budgétaire et facilite la corrélation entre rétributions et résultats. La menace de non‐collaboration ou la menace d'expulsion, dans les périodes ultérieures, contribue à coordonner les mesures incitatives, ce que ne permet pas de réaliser un jeu à période unique.

We show that a firm can use its decentralized organizational structure and transfer price as commitment devices to obtain strategic advantage in the product market only when there are nonstrategic reasons to decentralize and to distort transfer prices away from marginal costs, such as the sales office's local knowledge about market conditions and the presence of tax rate differentials across the two tax jurisdictions. Surprisingly, an increase in the sales office's tax rates may help a firm increase overall profits. An increase in the sales office's tax rates causes the firm to increase its transfer price, which in turn dampens the sales office's competition and may more than offset the effect of increased tax rates on the firm's overall profits.

We show that a firm can use its decentralized organizational structure and transfer price as commitment devices to obtain strategic advantage in the product market only when there are nonstrategic reasons to decentralize and to distort transfer prices away from marginal costs, such as the sales office's local knowledge about market conditions and the presence of tax rate differentials across the two tax jurisdictions. Surprisingly, an increase in the sales office's tax rates may help a firm increase overall profits. An increase in the sales office's tax rates causes the firm to increase its transfer price, which in turn dampens the sales office's competition and may more than offset the effect of increased tax rates on the firm's overall profits.

This paper analyzes the effects of forward-looking metrics on employee decision-making. We use data from a bank that started providing branch managers with the customer lifetime value (CLV)—an estimate of the future value of the customer relationship—of mortgage applicants. The data allow us to gauge the effects of enriching the employees' information set in an environment where explicit incentives and decision rights remained unchanged. On average, customer value increased 5 percent after the metric's introduction. The metric's availability resulted in a significant shift in attention toward more profitable client segments and some improvement in cross-selling. However, the use of CLV did not negatively impact pricing or default risk, as the literature predicts. Finally, branch managers with shorter tenure displayed a stronger response, consistent with information substituting for experience.