A fundamental problem of incentive contracting, often referred to as the ratchet effect, is that good performance in one period may be penalized by next-period targets that are more difficult to achieve. Several studies provide evidence that favorable performance relative to target is associated...

We study the determinants of organizational slack in large decentralized firms and focus in particular on how management accounting systems (represented by business unit controllers) affect slack. We rely on an adverse selection model to derive several predictions and to motivate our tests....

Using current performance to set future targets can discourage effort and reduce performance. Our study examines whether this ratchet effect also undermines incentives of high-level managers and executives. We use a dynamic model to show that empirical tests used in prior literature can falsely...

Performance evaluations are typically based on a formula that specifies in advance all performance measures, their relative incentive weights, and targets to be met. However, beginning-of-year performance targets can become outdated due to unforeseen events, which calls for ex post adjustments...

We characterize the effects of different methods of taxing multinational income on productive efficiency in a competitive equilibrium. The efficient outcome is achieved when every firm that produces and sells domestically faces the same tax rate as a multinational firm selling into the same...