Using delegation and control systems to mitigate the trade-off between theperformance-evaluation and belief-revision uses of accounting signals

Two trade-offs arise in an agency relationship when the same accounting sig nal is used for both performance evaluation and investment evaluation. Usin g the signal for performance evaluation, (1) directly influences the inform ativeness of the signal for investment evaluation, and (2) induces manipula tion, which, in turn, lowers the informativeness of the signal for investme nt evaluation. The principal can increase her welfare by delegating the inv estment decision to the agent, setting up multiple control systems, or usin g the outcome of the investment for performance evaluation. We show the imp lications of using each alternative on incentive contracts, equilibrium eff ort, and manipulation levels. (C) 1998 Elsevier Science B.V. All rights res erved.