An emerging body of research on teams highlights the importance of implicit incentives for cooperation and/or collusion that rely on mutual monitoring among team members. Whereas prior research on mutual monitoring in team production settings typically assumes that agents have identical abilities, this paper examines how such incentives operate when team members differ in their productive abilities. We show that the role of productive heterogeneity depends on the nature of team production. In cross-functional teams, collusion does not arise, and productive heterogeneity does not alter the qualitative nature of cooperative incentives. In functional teams, heterogeneity introduces additional (binding) constraints that ensure that both more and less productive agents are motivated to cooperate. However, when collusion among team members is a concern, productive heterogeneity can be advantageous. The optimal means of preventing collusion in functional teams is to employ asymmetric contracts, where the more productive agent receives higher-powered collusion-proof incentives. Asymmetric contracts shift effort away from the more productive agent under potential collusion, which reduces the agents' joint gains from collusion. Productive heterogeneity is advantageous in functional teams when there is a high degree of productive substitutability and/or a high discount factor. These conditions lead to a severe collusion problem, which is mitigated by productive heterogeneity. When the productive substitutability and/or the discount factor are low, the optimal productive heterogeneity is either small or none. We also study optimal team design, allowing the principal to choose between a functional team and a cross-functional team and the optimal level of productive heterogeneity.

This special issue of Foundations and Trends® in Accounting presents perspectives on carbon accounting and reporting. According to Sangster (2016), traditional double-entry bookkeeping most likely emerged in the 13th century to enhance financial accountability. Similarly, double-entry carbon accounting is emerging in response to modern needs, particularly the need for emissions tracking in supply chains. The works in this issue were contributed by leading academic and practitioner experts on carbon accounting. The authors highlight key challenges, including Scope 3 emission double counting, reliance on third-party estimates, the allocation of emissions to products, the importance of integrating carbon accounting with traditional financial and managerial accounting systems, and the need for generally accepted carbon accounting principles. Drawing on Hatfield’s and Ijiri’s work, this introduction argues that double entry’s causal and accountability-focused nature make it well suited to driving corporate action on emissions reduction. Double-entry bookkeeping revolutionized financial accountability centuries ago, and today, its principles are shaping a new frontier—carbon accounting. The articles in this issue on Perspectives on Carbon Accounting and Reporting were contributed by leading academic and practitioner experts on carbon accounting. The authors highlight key challenges, including responsibility for Scope 3 emissions, reliance on third-partyestimates, the allocation of emissions to products, the importance of integrating carbon accounting with traditional financial andmanagerial accounting systems, and the need for commonly accepted carbon accounting standards. Double-entry bookkeeping revolutionized financial accountability centuries ago, and today, its principles are shaping a new frontier—carbon accounting. The articles in this issue on Perspectives on Carbon Accounting and Reporting were contributed by leading academic and practitioner experts on carbon accounting. The authors highlight key challenges, including responsibility for Scope 3 emissions, reliance on third-party estimates, the allocation of emissions to products, the importance of integrating carbon accounting with traditional financial and managerial accounting systems, and the need for commonly accepted carbon accounting standards.

We study optimal workforce and contract design for a firm that employs a team of two agents. The agents have possibly diverse demographic characteristics captured by their discount factors. When both agents have relatively low discount factors (impatient agents), the optimal contract is designed to foster cooperation, whereas when both agents have relatively high discount factors (patient agents), the optimal contract is designed to both foster cooperation and prevent collusion. In preventing collusion, the principal optimally targets the less patient agent by offering him higher-powered incentives, while the more patient agent is offered lower-powered incentives to promote cooperation. Offering high-powered incentives to the less patient agent, who is also less susceptible to collusion, makes it costlier for the more patient agent to bribe the less patient agent into colluding. The optimal workforce is a diverse one consisting of one agent with the highest discount factor and a second agent with a discount factor that is just low enough that both agents can be offered cooperative incentives without inviting collusion. We also study optimal team design for four agents with given discount factors—two with low discount factors and two with high discount factors—who are to be assigned to two teams and identify conditions under which diverse assignment is optimal. This paper was accepted by Ranjani Krishnan, accounting. Funding: J. Glover acknowledges financial support from the George O. May Professorship in Financial Accounting at Columbia Business School. E. Kim acknowledges financial support from the PSC-CUNY Award [Cycle 55], jointly funded by the Professional Staff Congress and The City University of New York. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.00855 .

A problem that arises in buyer-supplier relationships is that a supplier may be reluctant to undertake costly up-front innovations fearing he will be held up at the time of price negotiations with the buyer. In one-shot encounters, one way to mitigate the hold-up problem is to design an information system that creates information rents and, hence, incentives for innovation for the supplier. We consider repeated hold-up problems in which the buyer can be trusted to honor promises that would not be self-enforcing in a one-shot game. We show that trust can be a substitute or a complement to information system design. In particular, we identify conditions under which a lower discount rate (which is one of the determinants of trust) leads to more or less information sharing. The observation that the optimal way to sustain and utilize trust can take the form of creating more opacity (and, hence, a greater information asymmetry) challenges conventional wisdom.

We study a team-based contract design problem between a principal and two productively heterogenous agents who can mutually monitor each other in an infinite period setting. Repeated work relationships create tacit incentives the principal can utilize when designing explicit contracts to promote a good work culture (fostering cooperation while preventing collusion). Under a productive complementarity, asymmetric productivity generates qualitatively similar results to those derived in previous models with symmetric agents. In particular, collusion is never a pressing concern, and the contract form does not depend on the discount factor. However, under a productive substitutability, asymmetric productivity makes the qualitative form of the contract depend on the discount factor. In particular, it is more costly for the principal to create cooperative incentives (for intermediate discount factors) and less costly for the principal to combat collusion (for high discount factors) because of the productive asymmetry. Hence, standard predictions regarding team-based incentives for productively homogenous agents require significant modifications when dealing with productively heterogenous agents.

This paper develops a positive role for accounting conservatism in fostering relational contracts between two agents in a two-period model of moral hazard. Building on Kreps (1996), the principal in our model designs a conservative measurement system and optimal contracts to create multiple equilibria that foster a team-based corporate culture. Accruals introduced by conservatism increase each agent's stake in the future of the relationship when it matters most—when it is going badly. This makes staying in the relationship worthwhile for the agents, even if they plan to play a low payoff equilibrium in the second period to punish first-period free-riding. In turn, this allows the principal to use lower-powered (and less costly) team incentives in the first period of the relationship. In contrast, deferred compensation increases each agent's stake in the future of the relationship when it is going well, making it less efficient in fostering relationships.

We study optimal team design (homogenous vs. diverse assignment) and explicit contracting in a setting with multiple agents who have possibly diverse demographic characteristics captured by their discount factors. When the agents have relatively small discount factors, the contract is designed to foster cooperation. In this case, either team assignment is irrelevant or homogenous assignment is optimal. The reason that homogenous assignment can be optimal is that diverse assignment complicates the provision of punishments used to deter free-riding. When the agents have relatively large discount factors, the contract is designed to prevent tacit collusion while motivating cooperation. In this case, diversity in the agents’ implicit incentives creates a latent benefit: the principal targets the less patient agent with higher-powered incentives to combat collusion, while the more patient agent is induced to cooperate using lower-powered incentives. We also study optimal workforce design (all patient, all impatient, or a mix of patient and impatient employees) by allowing the principal to choose discount factors of her employees and identify conditions under which each type of workforce is optimal.

We study optimal team design. In our model, a principal assigns either heterogeneous agents to a team (a diverse team) or homogenous agents to a team (a specialized team) to perform repeated team production. We assume that specialized teams exhibit a productive substitutability (e.g., interchangeable efforts with decreasing returns to total effort), whereas diverse teams exhibit a productive complementarity (e.g., cross-functional teams). Diverse teams have an inherent advantage in fostering desirable implicit/relational incentives that team members can provide to each other (tacit cooperation). In contrast, specialization both complicates the provision of cooperative incentives by altering the punishment agents can impose on each other for short expected career horizons and fosters undesirable implicit incentives (tacit collusion) for long expected horizons. As a result, expected compensation is first decreasing and then increasing in the discount factor for specialized teams, while expected compensation is always decreasing in the discount factor for diverse teams. We use our results to develop empirical implications about the association between team tenure and team composition, pay-for-performance sensitivity, and team culture. This paper was accepted by Brian Bushee, accounting.

ABSTRACT Teamwork and team incentives are increasingly prevalent in modern organizations. Performance measures used to evaluate individuals' contributions to teamwork are often non-verifiable. We study a principal-multi-agent model of relational (self-enforcing) contracts in which the optimal contract resembles a bonus pool. It specifies a minimum joint bonus floor the principal is required to pay out to the agents, and gives the principal discretion to use non-verifiable performance measures to both increase the size of the pool and to allocate the pool to the agents. The joint bonus floor is useful because of its role in motivating the agents to mutually monitor each other by facilitating a strategic complementarity in their payoffs. In an extension section, we introduce a verifiable team performance measure that is a noisy version of the individual non-verifiable measures, and show that the verifiable measure is either ignored or used to create a conditional bonus floor.

A unique feature of the outside director market is that a director usually simultaneously works for several companies. In this paper, based on the linear-exponential-neutral (LEN) framework, I find that the relationship between optimal incentives (pay-performance sensitivity) and the number of directorships is always positive, no matter efforts across directorships are substitutive or complementary.

ABSTRACTThis article studies contracts between a principal and an agent that are robust to information asymmetries about measurement quality. Our main result is that an information asymmetry about measurement quality not only reduces the usefulness of a given performance measure for stewardship purposes, it also qualitatively changes the way the performance measure is used if the information asymmetry is sufficiently large. We also study the manipulability of performance measures, assuming that poor measurement quality creates room for manipulation via selective (cherry‐picked) corrections by the agent. With known imperfect measurement quality, manipulability lowers the cost of providing incentives. Manipulability introduces overstatements only, while imperfect measurement introduces both overstatements and understatements. However, with an information asymmetry about measurement quality, manipulability can increase the cost of providing incentives, since there is now an induced information asymmetry about manipulability.

We study the intertemporal properties of accounting conservatism with a focus on managerial incentives. In our main model, conservatism results in smaller expected payouts to the manager (agent) in early periods and larger expected payouts in later periods. Conservatism shifts (ambiguous) evidence that might be used to recognize good performance in early periods to later periods. In later periods, good performance is less informative, since good news might mean good current period performance and might also mean good prior period performance whose recognition was delayed. Because of the intertemporal shift in the information content of performance measures, incentives provided in future periods can spillback to early periods, making conservatism preferred by the principal (shareholders). We also study an extension in which the principal learns about the firm over time. In the learning model, conservatism is optimal because it reduces the expected payment in the first period when providing incentive is more difficult than it is in the second period. In a final extension, we study overlapping projects that give rise to a multi-task setting. In the multi-task setting, unbiased accounting is preferred to a maximally biased one (conservative or aggressive) when bias introduces so much measurement heterogeneity that one of the otherwise identical projects becomes a significant “bottleneck.” When the projects are productively heterogeneous and one of the projects would be a bottleneck without bias, conservative bias can make the two projects more similar from a measurement perspective, eliminating the bottleneck.

This paper discusses Yuji Ijiri's notion of accountability, the central role it played in his research, and its importance to conceptual frameworks of accounting.

A common means of incorporating non-verifiable performance measures in compensation contracts is via bonus pools. We study a principal-multi-agent relational contracting model in which the optimal contract resembles a bonus pool. It specifies a minimum joint bonus floor the principal is required to pay out to the agents and gives the principal discretion to use non-verifiable performance measures to both increase the size of the pool and to allocate the pool to the agents. The joint bonus floor is useful because of its role in motivating the agents to mutually monitor each other (team incentives). In an extension section, we introduce a verifiable team performance measure, in part to establish the robustness of our results. In this case, the optimal contract either ignores the team measure completely or uses it to create a conditional bonus floor (a floor only when the team measure is high). There is a minimum precision requirement on the team measure that has to be satisfied before the team measure is used to motivate mutual monitoring.

ABSTRACT While it is generally believed that insulating cost allocations help managers focus their attention on their own actions and shield them from the actions of others, non-insulating schemes can have appeal by encouraging teamwork and/or mutual monitoring among divisions. In this paper, we demonstrate that non-insulating allocations can induce fruitful cooperation among parties even when teamwork and mutual monitoring are nonissues. In particular, we show that in the case of intra-firm trade governed by transfer pricing, non-insulating allocations can permit one division to internalize benefits of private information borne by another and thereby alleviate information-induced trade barriers. Unlike in the traditional case of fostering teamwork, however, the cooperative nature of non-insulating allocation introduced by information differences is distinctly more circumstance-specific. In line with this view, the paper also identifies conditions under which the use of non-insulating allocation shifts divisional incentives in a manner that only adds further tension to trade.

Evans, Moser, Newman, and Stikeleather (2016) use experiments of a one-shot game to analyze the impact of open versus closed internal reporting on collusive managerial behavior. They interpret their results as inconsistent with economic theory. To better contrast their findings with economic theory and to expand their view of same, we sketch economic models capable of explaining many aspects of their results. We also critique the research design and offer an alternative payoff structure. We then relate their experiments to the seminal research of Berg, Dickhout, and McCabe (1995) on trust and reciprocity. Finally, we provide suggestions for further research.

We study a dynamic multi-agent model with a verifiable team performance measure and non-verifiable individual measures. The optimal contract can be interpreted as an explicit contract that specifies a minimum bonus pool as a function of the verifiable measure and an implicit contract that gives the principal discretion to increase the size of the pool and to allocate it among the agents. To mitigate the threat of collusion, the optimal contract often converts any exogenous productive interdependence into strategic payoff independence for the agents. Under productive complements, an unconditional bonus pool (pay without performance) can be less costly than one conditioned on the verifiable team measure.

In this paper, we describe a bankruptcy game played in a pure-exchange, perfectly competitive economy, and establish the existence of competitive equilibria. The game admits of lying by borrowers and costly auditing by lenders. The equilibria are characterized by (endogenously determined) equilibrium probabilities of default, loan quantities, interest rates, and default risk premia, and by equilibria simultaneously determined in risk-free debt markets. We find that the optimal debt contract is the standard debt contract, and that the risk-free debt market may be inactive, as all parties may strictly prefer risky debt contracts to risk-free debt. ∗Many thanks to workshop participants at Carnegie Mellon University and at NHH, and to conference participants at the Western Economic Association International 2009 Pacific Rim Meeting and the European Accounting Association 2009 Annual Meeting. We are especially grateful to Goksel Asan, Nick Baigent, John Dickhaut, Frank Gigler, Jonathan Glover, Chandra Kanodia, Carolyn Levine, Kjell Nyborg, Per Östberg, Ricardo Reis, Remzi Sanver, and Shin Sato. †Carlson School of Management, University of Minnesota. jkareken@umn.edu ‡Tepper School of Business, Carnegie Mellon University jstecher@cmu.edu

This manuscript responds to the request for comment on the SEC Concepts Release, International Accounting Standards (File No. S7-04-00). The Financial Accounting Standards Committee of the American Accounting Association (hereinafter, the Committee) is charged with responding to requests for comments from standard setters and regulators on financial reporting issues. The opinions in this letter reflect the views ofthe individuals on the committee and not those ofthe American Accounting Association.

In this paper, we investigate whether a regulation that mandates a greater proportion of outside directors on a corporate board results in a more independent board. Instead of taking the fraction of outside directors directly as the measure of board independence, we define it as the nominal independence level. The real independence level of the board is determined by both the nominal independence level and the length of the relationship between board members and the CEO. We assume that the real independence between a board member and the CEO decreases over time as long as the board member stays on the board. In our dynamic model, the board both monitors and advises the CEO, and the CEO decides whether to replace one of the directors in each period. The CEO’s tradeoff is between the possibly higher board expertise introduced by new directors versus the lower board real independence obtained by retaining the same directors. In our model, the higher the nominal independence level of the board, the more reluctant the CEO is in replacing existing directors. The resultant longer tenure of outside directors makes the CEO even less willing to replace them. Regulations that mandate higher nominal independence can have the unintended consequence that they lower both the real independence and the expertise of the board of directors in the long-run.