RIEB, Kobe University

Contract Rigidity and Timeliness of Accounting Information

This paper investigates the relationship between contract rigidity and the timeliness of accounting information in a two-period principal–agent setting. Specifically, we first analytically and then experimentally examine the role of the timeliness of accounting information in different contractual settings (i.e., flexible and stationary contracts). Under the flexible contract regime, a principal can set different fixed wages and incentive weights in the first and second periods, respectively. By contrast, under the stationary contract regime, a principal must set the same fixed wages and incentive weights over the two periods. We compare the overall performance in the high- and low-timeliness cases and find the following three main results. First, the timeliness of accounting information plays a key role under the stationary contract regime. Second, the timeliness of accounting information does not matter under the flexible contract regime because a principal can accommodate the timeliness of accounting information by adjusting the parameters of a compensation contract. Third, we analytically show that the overall performance under the flexible contract regime is better than that under the stationary contract regime. However, our experiment shows that the efficiency of the stationary contract exceeds the efficiency of the flexible contract.