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| Author: | Rogerson, W. P. |
| Title: | Intertemporal cost allocation and managerial investment incentives: A theory explaining the use of economic value added as a performance measure |
| Journal: | Journal of Political Economy
1997 : AUG, VOL. 105:4, p. 770-795 |
| Index terms: | INVESTMENT INCENTIVES COST ALLOCATION VALUE ADDED COMPANY PERFORMANCE MEASUREMENT |
| Language: | eng |
| Abstract: | This study considers a principal-agent model of the relationship between the shareholders and manager of a firm in which there are two incentive problems. Shareholder delegates an investment decision to the manager because he has better information than shareholders to base this decision on. The manager also exerts an unobservable level of effort each period that increases the company's cash flows. With this situation, the problem is that two incentive problems generally interfere with one another. The results show that a very large class of contracts exist that dramatically simplify this problem but still allow shareholders to achieve a high level of expected utility. This study provides a theory of both why income may be used as performance measure for management and how income should be calculated for this purpose. |
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