Take Action

Home | Faculty & Research Overview | Research

Research Details

Variable Cost Allocation in a Principal/Agent Model, Accounting Review

Abstract

A principal-agent relation is analyzed where the agent chooses an unobservable effort level and an observable level of utilization of a resource supplied by the principal. When the agent has private information about the usefulness of the principal's resource, it is shown that the optimal compensation function must include the resource level as an argument. That is, some form of "cost allocation" appears to be part of the optimal solution to the principal's problem. Further analysis shows that standard cost allocation techniques (where the agent is allocated more costs if he or she uses more of the resource) may not be efficient in motivating the agent's choices. In some circumstances, it may be optimal to pay the agent more if he or she used more of the principal's resource.

Type

Article

Author(s)

Robert Magee

Date Published

1988

Citations

Magee, Robert. 1988. Variable Cost Allocation in a Principal/Agent Model. Accounting Review. 63(1)

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action