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ACCOUNTING INFORMATION AND OPTIMAL INCENTIVE CONTRACTS IN A MULTI-OBJECTIVE SETTING (UNCERTAINTY, PLANNING, DECISION-MAKING)
Abstract
The purposes of this study are (1) to investigate the importance of accounting information systems and signals in a normative approach for originating labor-management, Pareto-optimal incentive contracts; (2) to extend the concept of agency theory by introducing a model that applies a firm's accounting information and budgetary system to situations in which management faces multiple-objective criteria affecting employment contract decisions to be made under uncertain conditions; and (3) to operationalize the model developed in objective (2) by applying it to the operations of a CPA firm with the CPA's manager formulating a multi-objective contractual model. Using a MOLP technique known as "the method of constraints," this study shows that when management deals with multi-objective contractual decisions and when the CPA firm's accounting system provides information that explicitly formulates the agent-principal model, management can quantitatively determine the effects of a given labor contract on the operations of the firm and its other objectives. The sensitivity of each alternative contract and the amount of sacrifices that must be made by management to satisfy labor's demands are also presented. In addition, this study shows that no single Pareto-optimal solution automatically leads to a maximization of the agent-principal model. Instead, a set of Pareto-optimal points generates the information management needs to select the most desirable Pareto-optimal solution. This set delineates the optimal scheduling assignments of each auditor for each activity, given each alternative solution. Such a useful scheduling assignment not only shows the future assignments of each auditor for each activity, but also reflects the necessary changes in the auditors' assignments for each activity as a result of hiring new labor. Since the model presented in this study requires no a priori assessment of the manager's utility function, accountants can simply employ it to produce the set of efficient contracts and then present the generated results to management for selecting the most efficient contract consistent with the firm's objectives. In effect, this model enhances the utility of managerial accounts and facilitates the contractual agreement decision process by providing a quantitative basis in which the most efficient contract can be selected by management.
Subject Area
Accounting
Recommended Citation
NAMAZI, MOHAMMAD, "ACCOUNTING INFORMATION AND OPTIMAL INCENTIVE CONTRACTS IN A MULTI-OBJECTIVE SETTING (UNCERTAINTY, PLANNING, DECISION-MAKING)" (1983). ETD collection for University of Nebraska-Lincoln. AAI8412315.
https://digitalcommons.unl.edu/dissertations/AAI8412315