accounting theory
Instructor’s Manual—Chapter 9
CHAPTER 9
An Analysis of Conflict
9.1
Overview
9.2
Understanding Game Theory
9.3
A Non-Cooperative Game Model of Manager-Investor Conflict
9.3.1 Summary
9.4
Some Models of Cooperative Game Theory
9.4.1 Introduction
9.4.2 Agency Theory: An Employment Contract Between Firm Owner and Manager
9.5
Manager’s Information Advantage
9.5.1 Earnings Management
9.5.2 Controlling Earnings Management
9.6
Discussion and Summary
9.7
Agency Theory: A Bondholder-Manager Lending Contract
9.8
Implications of Agency Theory for Accounting
9.8.1 Is Two Better Than One?
9.8.2 Rigidity of Contracts
9.9
Reconciliation of Efficient Securities Market Theory with Economic
Consequences
9.10
Conclusions on the Analysis of Conflict
Copyright © 2009 Pearson Education Canada
252
Instructor’s Manual—Chapter 9
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
1.
To Introduce Fundamental Concepts of Non-Cooperative Game Theory
My objectives here are quite limited, being confined to developing the intuition underlying a simple, one-shot, prisoner’s dilemma type of game. I concentrate on the concept of strategic decision-making where, for each decision maker, the possible actions of a rational opponent need to be taken into account. Using the Nash equilibrium concept, I show how game theory can model and predict the outcome of conflict situations. The idea is to demonstrate that investors and managers are in a conflict situation since the manager’s interest in financial reporting can conflict with what is in the investor’s best interests. As a result, capital markets will not work as well as they could. This is captured in the game by the Nash equilibrium outcome leaving each party less well off than the cooperative solution.
To attain the cooperative solution, I suggest that a standard setting body, by controlling the payoffs of the game, can influence its outcome.
CHAPTER 9
An Analysis of Conflict
9.1
Overview
9.2
Understanding Game Theory
9.3
A Non-Cooperative Game Model of Manager-Investor Conflict
9.3.1 Summary
9.4
Some Models of Cooperative Game Theory
9.4.1 Introduction
9.4.2 Agency Theory: An Employment Contract Between Firm Owner and Manager
9.5
Manager’s Information Advantage
9.5.1 Earnings Management
9.5.2 Controlling Earnings Management
9.6
Discussion and Summary
9.7
Agency Theory: A Bondholder-Manager Lending Contract
9.8
Implications of Agency Theory for Accounting
9.8.1 Is Two Better Than One?
9.8.2 Rigidity of Contracts
9.9
Reconciliation of Efficient Securities Market Theory with Economic
Consequences
9.10
Conclusions on the Analysis of Conflict
Copyright © 2009 Pearson Education Canada
252
Instructor’s Manual—Chapter 9
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
1.
To Introduce Fundamental Concepts of Non-Cooperative Game Theory
My objectives here are quite limited, being confined to developing the intuition underlying a simple, one-shot, prisoner’s dilemma type of game. I concentrate on the concept of strategic decision-making where, for each decision maker, the possible actions of a rational opponent need to be taken into account. Using the Nash equilibrium concept, I show how game theory can model and predict the outcome of conflict situations. The idea is to demonstrate that investors and managers are in a conflict situation since the manager’s interest in financial reporting can conflict with what is in the investor’s best interests. As a result, capital markets will not work as well as they could. This is captured in the game by the Nash equilibrium outcome leaving each party less well off than the cooperative solution.
To attain the cooperative solution, I suggest that a standard setting body, by controlling the payoffs of the game, can influence its outcome.