Contracting and Income Smoothing in an Infinite Agency Model

Washington University, Olin Working Paper Series OLIN-97-16

Posted: 20 Mar 1998

See all articles by Richard T. Boylan

Richard T. Boylan

Rice University - Department of Economics

Bente Villadsen

The Brattle Group

Date Written: February 1998

Abstract

Previous results on infinitely repeated agency do not allow income smoothing because it generates interdependence across time periods and private information for managers. Propositions 1-2 and Theorem show how to use dynamic programming to solve the agency problem. By using dynamic programming, numerical results are obtained that show how managerial compensation, firm value, and accrual accounting interact. Specifically, income smoothing signals future income and the closer a firm is to bankruptcy, the greater the fraction of compensation which is deferred to the future.

JEL Classification: C61, C63, C73, D92, G35, M41

Suggested Citation

Boylan, Richard T. and Villadsen, Bente, Contracting and Income Smoothing in an Infinite Agency Model (February 1998). Washington University, Olin Working Paper Series OLIN-97-16, Available at SSRN: https://ssrn.com/abstract=68848

Richard T. Boylan (Contact Author)

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States

Bente Villadsen

The Brattle Group ( email )

44 Brattle Street
3rd Floor
Cambridge, MA 02138-3736
United States

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