Accounting, innovation, and incentives

This paper studies two scenarios of incentive issues related to innovation: the first is related to organizational innovation and the second is related to technological innovation. In the first scenario, we show that diversification across substitutive projects can actually make incompetent management more visible, and hence reduce incentive costs. In the second scenario, we illustrate that the new accounting standard on goodwill impairment may have a positive impact on incentive contracts even when the agent does not have control over the result of the impairment test. In both scenarios, we emphasize the out-of-equilibrium stewardship role of accounting information. We also stress the importance of distinguishing information content from value of information in contracting. (c) 2006 Elsevier B.V. All rights reserved.