Accounting Measurement and Employment Contracts: Current Value Reporting

In most organizations, the accounting system is the primary source of "observables," such as payoffs, actions, etc. This paper explores the effects of one aspect of accounting systems, namely the method of valuation of assets and liabilities, on the structure of incentives. It is found that the employee's allocation of effort will be different under historical cost valuation than under current valuation methods, but that under some conditions, the owner's payoff is not necessarily higher under the current value system, even if such a system is no more expensive than a historical cost system.