Profit allocation under ancillary trade

Article Abstract:

A model is constructed to analyze the issues of controlling and coordinating independent activities at the same time in a divisionalized firm. The firm is assumed to undertake tasks which are aimed at independent production and others which are aimed at coordinate production. Two large divisions within the firm are specifically studied that may have an opportunity to enter into an alliance to pursue a smaller ancillary activity. Results suggest that profit allocation is skewed in favor of the division with the relatively smaller control problem. The best way to boost information content of the divisional profit measures appears to rely substantially on the idiosyncratic details of the setting. Data also suggests that transfer price policy is used to carry evaluative information to top management.

Pricing Policy, Accounting and auditing, Profits, Pricing, Transfer pricing, Corporate distributions, Corporate profits, Branches (Business enterprises)

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Discussion of divisional versus company-wide focus: the trade-off between allocation of managerial attention and screening of talent

Article Abstract:

Darrough and Melumad (1995) investigated the use of risky contracts to screen potential managers with different abilities. In the study, titled 'Divisional versus Company-Wide Performance Measures: The Trade-Off between Allocation of Managerial Attention and Screening of Talent,' the problem is examined in two settings. Both settings involve the use of a contract by the company owner to hire a manager who is risk-averse but not effort-averse. By offering a high-risk contract, the owner is able to separate the high-talent manager from the low-talent type. Their findings suggest that there are instances when it is advantageous to use contracts to motivate managers to concentrate on divisional objectives rather than on corporate goals. Some of the limitations of the study are discussed.

Research, Usage, Evaluation, Recruiting, Executives, Organizational effectiveness, Labor contracts, Executive ability, Executive recruiting

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Discussion of performance measure garbling under renegotiation in multi-period agencies

Article Abstract:

A study dealing with the garbling of performance measures under renegotiation in a multi-period agency is discussed. A major obstacle to theoretical research in earnings management has been the revelation principle, which states that any equilibrium involving non-truthful reporting can be duplicated or beaten under certain conditions in terms of expected utilities by an equilibrium that induces truthful reporting. This principle, developed as a modeling tool, has been misused as a realistic description of equilibria. The research model and analysis are discussed extensively, along with the issue of why earnings management takes such a form and interpretation of the 'garbling' result.

Science & research, Psychological aspects, Contracts

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