Advances in Economics and Business Vol. 1(2), pp. 39 - 48
DOI: 10.13189/aeb.2013.010201
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Moral Hazard and Earnings Manipulation


Anton Miglo*
School of Business, University of Bridgeport, Bridgeport, CT 06604

ABSTRACT

We consider a principal-agent relationship, where the agent is subject to a double moral hazard problem (the choice of production effort and earnings manipulation). Since the agent cannot completely capture the results of his effort, the production effort is socially inefficient. The opportunity to manipulate earnings protects the agent against the risk of a low payoff when the results of production are low. Ex-ante, this provides an incentive for the agent to improve effort. Optimal contract trades-off social loss from earnings manipulation and improved incentives for productive effort. In equilibrium some degree of earnings manipulation can be optimal.

KEYWORDS
Earnings Manipulation, Intertemporal Substitution, Incomplete Contracts, Double Moral Hazard

Cite this paper
Anton Miglo . "Moral Hazard and Earnings Manipulation." Advances in Economics and Business 1.2 (2013) 39 - 48. doi: 10.13189/aeb.2013.010201.