Managerial performance evaluation for capacity investments
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This paper examines the design of managerial performance measures based on accounting information. The owners of the firm seek to create goal congruence for a better informed manager who is to decide on capacity investments and subsequent production levels. Managerial incentives are shaped by the performance metric and the depreciation schedule for capacity assets. Earlier literature has made the distinction between capacity assets whose degradation is primarily usage-driven as opposed to time-driven. Our analysis also distinguishes between two plausible scenarios in which an inherent lumpiness in the efficient scale of investments necessitates one upfront investment as opposed to a sequence of incremental capacity additions over time. For each of the four resulting scenarios, we obtain a complete characterization of the entire class of goal congruent performance metrics and depreciation schedules. The final part of our analysis also explores goal congruence in settings where the decline of asset productivity is a function of both time and usage.
KeywordsPerformance measurement Managerial incentives Accrual accounting
JEL ClassificationM40 M41 D82
We are grateful to Tim Baldenius, Madhav Rajan, and seminar participants at the NYU/Yale joint seminar for comments on an earlier version of this paper. We are also grateful to Paul Fischer (the editor) and an anonymous reviewer for their constructive suggestions.
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