Contracting and Income Smoothing in an Infinite Agency Model
Washington University, Olin Working Paper Series OLIN-97-16
Posted: 20 Mar 1998
Date Written: February 1998
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: Suggested Citation