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ACCY304-20%20Contracting%26performancemanagementII

ACCY304-20%20Contracting%26performancemanagementII -...

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Contracting and Performance  Measurement II Session 20 April 13, 2011 1 Department of Accountancy University of Illinois at Urbana-Champaign
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Contracting with private information Agents often have private information about their  performance expectations How should the principal specify the terms of the  contract so as to reduce his informational  disadvantage? 2 Department of Accountancy University of Illinois at Urbana-Champaign
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Contracting with private information Example: Salespeople Success depends on effort and the inherent potential  of their particular sales territories The principal does not know the potential of the  territories The principal wants to design a contract that pays  people working in better territories differently from  those in poorer territories 3 Department of Accountancy University of Illinois at Urbana-Champaign
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Contracting with private information What happens if the principal simply asks the  agent about the potential of his sales territory? The agent will have incentives to understate the  territory’s potential 4 Department of Accountancy University of Illinois at Urbana-Champaign
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Different contracts  Plan A: For low potential territories Fixed payment of $ 5,000 20% of the value of the sales Plan B: For high potential territories Fixed payment of $ 5,000 10% of the value of the sales 5 Department of Accountancy University of Illinois at Urbana-Champaign
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