Economic Analysis of Information and Contracts: Essays in Honor of John E. Butterworth PDF
Preview Economic Analysis of Information and Contracts: Essays in Honor of John E. Butterworth
Economic Analysis of Information and Contracts Essays in Honor of John E. Butterworth Economic Analysis of Information and Contracts Essays in Honor of John E. Butterworth Edited by Gerald A. Feltham University of British Columbia Amin H. Amershi University of Minnesota and William T. Ziemba University of British Columbia ~. Kluwer Academic Publishers "Boston Distributors for the United States and Canada: Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, MA 02061. for the UK and Ireland: Kluwer Academic Publishers, Falcon House, Queen Square, Lancaster LAI lRN, UK. for all other countries: Kluwer Academic Publlsners Group, Distribution Centre, P.O. Box 322, 3300 AH Dordrecht, The Netherlands Library of Congress Cataloging-in-Publication Data Economic analysis 01 information and contracts: essays in honor of John E. Butterworth/edited by Gerald A. Feltham, Amin H. Amershi, and William T. Ziemba. p. cm. Bibliography: p. Includes index. ISBN-13: 978-94-010-7702-6 e-ISBN-13: 978-94-009-2667-7 001: 10.1007/976-94-009-2667-7 1. Accounting. 2. Information theory in economics. 3. Butterworth, John E. I. Butterworth, John E. II. Feltham. Gerald A., 1936- III. Amershi, Amin H. IV. Ziemba, W. T. HF5625.E28 1988 657--dc 19 87-22508 CIP © 1988 by Kluwer Academic Publishers, Boston Softcover reprint of the hardcover 1st edition 1988 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permisSion of the publishers. Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, MA 02061 Typeset by Macmillan India Ltd., Bangalore 25. JOHN E. BUTTERWORTH JOHN E. BUTTERWORTH, BA, MA, MBA, Ph.D. 1926-1984 On August 4, 1984, at the age of 58, John E. Butterworth died of cancer. He is survived by his wife Faye, their six children, and his parents. He was greatly respected and appreciated by his colleagues at the University of British Columbia and by all others who knew him. He will be greatly missed. John was born in Manchester, England, in 1926. He studied English at Cambridge, receiving his Bachelor's degree in 1947 and his Master's degree in 1950. From 1950 to 1961, John was successively a works manager, pro- duction manager, and company director for Fine Wool Fabrics Ltd. of Wexford, Ireland. In 1962, John and his family moved to Berkeley, California. John sought to enter the North American management job market by obtaining an MBA at the University of California, and he completed that degree in 1963. In the course of his MBA studies, the faculty encouraged John to study for his Ph.D. and to enter the academic job market. John made that switch, studying accounting and operations research, and completed his degree in 1967. Upon graduation he joined the faculty at Johns Hopkins University in Baltimore, Maryland, where he taught both accounting and operations research. While John was at the University of California, Dean Philip White had attempted to entice him to join the Commerce faculty at the University of British Columbia, and in 1969 Dean White was successful in that endeavor. At the time John came to UBC, the faculty was in the midst of significant changes. The undergraduate program was undergoing major modifications and many new faculties were being added in order to increase the faculty's research capability, to strengthen its Master's program, and to introduce a Ph.D. program. John played an important role in all of these areas, and was greatly respected for the contributions that he made. vii Vlll JOHN E. BUTTERWORTH, 1926-1984 John provided leadership to the faculty throughout his career at UBC, and particularly assisted the faculty by serving in some key management posi- tions. He was the director of graduate studies from 1971 to 1973, chairman of the Accounting and Management Information Systems Division from 1974 to 1977, and director of the Ph.D. program from 1981 to 1984. In each case he provided strong, sensitive leadership. In addition, he served at various times on the Executive Committee; the Appointments, Promotion and Tenure Committee; the Dean's Selection Committee; and the Dean's Advisory Committee. John also provided leadership through his course development activities. He was instrumental in developing a management planning and control emphasis in the undergraduate and graduate cost accounting courses, and in applying quantitative methods in these courses. Furthermore, he initiated a graduate course in information economics and continually modified its content so that our Master's and Ph.D. students were provided with a strong research foundation in this area. John's leadership in various aspects of the graduate program in the Faculty of Commerce of the University of British Columbia was a natural extension of his strong interest in research. That interest had been kindled at the University of California. Accounting research underwent a dramatic change in the mid-sixties as two new major research areas were developed. At the University of Chicago, Ph.D. students were beginning to explore the relation- ship between accounting numbers and stock market prices and at the University of California, Ph.D. students were beginning to apply concepts from information economics to accounting theory. John was one of those students and his Ph.D. dissertation was among the very first to explore the link between accounting and information economics. The quality of that research is reflected in the fact that his dissertation received honorable mention in the McKinsey Foundation Doctoral Thesis Award. This compe- tition was open to dissertations from all business schools in all areas of research, and the submitted dissertations were evaluated by a distinguished panel of business school researchers in a variety of disciplines. John's dissertation was but the first step in his exploration of the funda- mental economic factors that influence the demand for information in general and accounting information in particular. His research from 1967 to 1984 is reviewed in Part I of this volume. Contents Photo of John E. Butterworth v John E. Butterworth, BA, MA, MBA, PhD: 1926-1984 vii List of Contributors xi Preface xiii Acknowledgments xiv PART I: INTRODUCTION John E. Butterworth's Pioneering Contributions to the Accounting and Information Economics Literature -Gerald A. Feltham 3 Introduction to the Research Papers in this Volume 17 PART II: INFORMATION EVALUATION IN MULTIPERSON CONTEXTS 23 1. Blackwell Informativeness and Sufficient Statistics with Applications to Financial Markets and Multiperson Agencies -Amin H. Amershi 25 2. The Social Value of Public Information in Production Economies -James A. Ohlson 95 3. Costly Public Information: Optimality and Comparative Statics -Young K. Kwon and D. Paul Newman 121 IX x CONTENTS 4. Value of Information in Bimatrix Games -Joel S. Demski 141 PART III: CONTRACTING IN AGENCIES UNDER MORAL HAZARD 167 5. The Principal/Agent Problem-Numerical Solutions -Phelim P. Boyle and John E. Butterworth 169 6. Explorations in the Theory of Single- and Multiple-Agent Agencies -Amin H. Amershi and John E. Butterworth 197 7. Sequential Choice Under Moral Hazard -Ella Mae Matsumura 221 8. Risk Sharing and Valuation Under Moral Hazard -Patricia J. Hughes 247 PART IV: CONTRACTING IN AGENCIES WITH PRIVATE INFORMATION 269 9. Communication of Private Information in Capital Markets: Colll:ingent Contracts and Verified Reports -Gerald A. Feltham and John S. Hughes 271 10. Managerial Compensation: Linear-Sharing vs. Bonus-Incentive Plans under Moral Hazard and Adverse Selection -Masako N. Darrough and Neal M. Stoughton 319 11. Intrafirm Resource Allocation and Discretionary Actions -Ronald A. Dye 349 12. Accountants' Loss Functions and Induced Preferences for Conservatism -Rick Antle and Richard A. Lambert 373 Subject Index 409 Author Index 413 List of Contributors Amin H. Amershi School of Management University of Minnesota Minneapolis, Minnesota 55455 Rick Antle School of Organization and Management Yale University New Haven, Connecticut 06520 Phelim P. Boyle Accounting Group University of Waterloo Waterloo, Ontario N2L 3G1 John E. Butterworth Deceased Masako N. Darrough Graduate School of Business Columbia University New York, New York 10027 Joel S. Demski School of Organization and Management Yale University New Haven, Connecticut 06520 Ronald A. Dye Kellogg School of Management Northwestern University Evanston, Illinois 60201 Gerald A. Feltham Faculty of Commerce and Business Administration University of British Columbia Vancouver, British Columbia V6T 1Y8 John S. Hughes Faculty of Commerce and Business Administration University of British Columbia Vancouver, British Columbia V6T 1Y8 XI xii LIST OF CONTRIBUTORS Patricia J. Hughes Graduate School of Management University of California Los Angeles, Cal ifornia 90024-1481 Young K. Kwon Department of Accountancy College of Commerce and Business Administration University of Illinois at Urbana-Champaign Champaign, Illinois 61820 Richard A. Lambert The Wharton School University of Pennsylvania Philadelphia, Pennsylvania 19104 Ella Mae Matsumura School of Business University of Wisconsin-Madison Madison, Wisconsin 53706 James A. Ohlson Graduate School of Business Columbia University New York, New York 10027 D. Paul Newman Department of Accounting Graduate School of Business University of Texas Austin, Texas 78712 Neal M. Stoughton Graduate School of Management University of California Irvine, California 92717
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