Contract-Based Motivation for Keeping Records of a Manager's Reporting and Budgeting History

Anil Arya, John C. Fellingham and Richard A. Young
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Anil Arya: The Ohio State University, College of Business, 1775 College Road, Columbus, Ohio 43210-1399
John C. Fellingham: Pennsylvania State University, College of Business Administration, University Park, Pennsylvania 16802
Richard A. Young: The Ohio State University, College of Business, 1775 College Road, Columbus, Ohio 43210-1399

Management Science, 1994, vol. 40, issue 4, 484-495

Abstract: This paper analyzes the role of the agent's bankruptcy constraints in multiperiod principal-agent models with asymmetric information. Conditions are provided under which commitment to a long-term contract involving N rounds of investment improves upon repetition of N identical single-period contracts. Further, when the agent's reservation wage is sufficiently low the optimal contract is always long term. Keeping records of a manager's history of reporting activity facilitates contracting, since optimal contracts may require a link between past reports and future investments over a duration of two or more periods.

Keywords: long-term contracts; agency theory; capital rationing; organizational slack (search for similar items in EconPapers)
Date: 1994
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