Managerial Accounting Case Study

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Register to read the introduction… We begin with developing our intuition about these models using a highly stylized representation of the principal-agent setting. Then we turn to the seminal papers in the area and work our way through some simple analytic models:

1. Prepare: Sally and Ralph’s Problem.

Discussion Questions:

1. Work through each scenario and explicitly state the assumptions that are being made. What is left unsaid in these models? 2. Describe how each scenario can be mathematically modeled. 3. Find examples from the research literature that fits each of the scenarios. Examine those papers carefully and describe the tradeoffs and assumptions that the authors had to make to fit their mathematical models to the scenario they were trying to replicate. 4. Develop new scenarios to extend the ones that you have been given.

Please write up your analysis of this case and be prepared to discuss in class.

2. Read: Holmstrom (1979)

Discussion Questions:

1. Our aim here is to solve the numerical example Holmstrom discusses on page 79 of his paper. He also provides a solution to the problem. Work through the math and verify that his solution is
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Banker, R., and Datar, S. M., Sensitivity, Precision and Linear Aggregation of Signals for Performance Evaluation, Journal of Accounting Research (1989) 27:21-39.

5. Myerson, R., Incentive Compatibility and the Bargaining Problem, Econometrica (1979) 47:61-78.

6. Antle, R., and G. Eppen, Capital Rationing and Organizational Slack in Capital Budgeting, Management Science (1985) 31:163-74.

7. Holmstrom, B. and P. Milgrom, Multi-task Principal Agent Analysis: Incentive Contracts, Asset Ownership and Job Design, Journal of Labor Economics and Organization (1991) 6(Spring).

8. Cohen, S. L., S.M. Dater and R. Lambert, Balancing Performance Measures, Journal of Accounting Research (Forthcoming).

9. Demski, J. S. and D. E. M. Sappington, Optimal Incentive Contracts with Multiple Agents, Journal of Economic Theory (1984) 33:152-71.

10. Lambert, R., Executive Effort and the Selection of Risky Projects, Rand Journal of Economics (1986) 17:77-88.

Topic 4: Learning by Refereeing

Refereeing papers is not just an essential task that accounting professors undertake for the good of the entire academic community, it is also a great way to improve ones own knowledge and

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