Formerly Graduate School of Industrial Administration (GSIA)
William Larimer Mellon, Founder
Schenley Park
Pittsburgh, Pennsylvania 15213-3890
United States of America

Pierre Jinghong Liang
Associate Professor of Accounting

Limited Managerial Attention and Endogenous Precision of Performance Measures

Pierre Jinghong Liang, Carnegie Mellon University
and Lin Nan, Purdue University
 

March 2013
Accepted and Forthcoming at European Accounting Reciew
 
Downloading the paper
2008-Nov First Draft
2013-Sep EAR Draft
 
Abstract
In this paper, we model two drivers which underlie the economic trade-off shareholders face in designing incentives for optimal effort allocation by managers. The firrst driver is limited managerial attention, by which we mean that performing one task may have an adverse effect on the cost-efficiency of performing another. The second is the presence of a performance reporting task, by which we mean the manager’s ability to exert personally costly effort to improve the precision (or quality) of his/her performance measures. We show that the subtle interactions of the two drivers may alter the characteristics of incentive provision. First, we show the interaction may lead to a positive relation between the strength of the incentive and the endogenous variance of the performance measures. Second, the interaction may render an otherwise useful performance signal useless. We show two cases in which an informative signal is discarded, for two distinct reasons. In one case the principal discards the signal whose precision can be improved by the manager, to order to discourages the manager from diverting attention to the performance reporting task (which makes the productive effort more costly). In another case with asymmetric information about the nature of the performance measurement system, the principal may discard the signal which cannot be inuenced by the manager in order to encourage a truthful self-report by the manager.
   
   
   
   

  English Version
Last updated October 21, 2013
send comments to liangj@andrew.cmu.edu 		Chinese Version
Last updated January 6, 2004
send comments to liangj@andrew.cmu.edu