Responsibility Accounting with a Privately Informed Agent

François Larmande and Jean-Pierre Ponssard
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François Larmande: EM - EMLyon Business School

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Abstract: The application of the controllability principle to eliminate external factors remains problematicinpractice. A key is sue concerns the fact that the manager may get some private pre-decision signal about this external environment and may use this information to mitigate or amplify its impact. The question is analyzed in a multi task agency model in which the agent has a limited liability, thus earns rents and is not indiferent to the task performed. Under certain conditions, it is proved that the optimal contractonlyse lective lye liminates the impact of the environment. It does neutralize it if the agent reports a signal of low impact of the environment but does not filter it out if the agent reports a signal of high impact.

Date: 2007
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