Working Papers

“Contracting on Endogenously Informative Signals ”

I study a multi-tasking setting in which an agent with square root utility takes productive actions that endogenously influence the informativeness of the outcomes they affect. I show that the equilibrium level of actions can be ranked by their endogenous effect on the variance of their likelihood ratios (holding the productivity and costs of the actions equal). For any positively-skewed distribution in the exponential family, mean-increasing actions reduce informativeness whereas mean-decreasing actions increase informativeness. An implication of this result is that if revenues and expenses are positively skewed, the principal will induce more cost-cutting effort than revenue growth, all else equal.

“Contracting on Information about Value,” with Jonathan Bonham (Download on SSRN)
Under review at Review of Economic Studies

We revisit the optimal use of information under moral hazard by assuming that the agent chooses distributions nonparametrically at a cost given by an f-divergence. Under this assumption, the optimal contract behaves as if the principal were making inferences about outcomes she values. Consequently, Holmström's (1979) informativeness principle does not apply. A performance measure is useful for contracting if and only if it is informative about value, not the agent's action.

“Contracting on Aggregated Accounting Estimates,” with Jonathan Bonham (Download on SSRN)

Using a principal-agent framework in which the agent chooses the joint distribution over all contractible and non-contractible signals, we provide a theoretical justification for contracting on aggregated accounting estimates. The optimal contracting process can be decomposed into three stages: estimating individual items that the principal values, aggregating those estimates using the weights in the principal's objective (as opposed to weights driven by sensitivity or precision), and writing a one-dimensional contract on the aggregated estimate. Using a highly tractable specification of our model in which optimal contracts are linear and normal distributions arise endogenously, we show that optimal measurement rules are conservative yet produce unbiased estimates, and we rationalize the immediate expensing of R&D, the capitalization of PP&E, and the accrual of credit sales.

“Motivating ESG activities through contracts, taxes and disclosure regulation,” with Jonathan Bonham (Download on SSRN)
Under review at Management Science

Using a model where firm managers can influence the entire distribution over financial and ESG outcomes, we examine how ESG activities can be motivated through 1) contracts, 2) taxes and 3) disclosure regulation. Executive compensation contracts can produce changes in a firm's ESG activities, but these changes are limited by how much shareholders actually value ESG. Taxes can align shareholder objectives more closely with societal objectives, but only to the extent that ESG outcomes can be reliably measured; moreover, taxes can have potentially unintended consequences when the taxed outcome is correlated with other outcomes. Finally, disclosure regulation can empower markets to partially self-discipline by providing information about firms' ESG technologies, as this enables powerful ESG-conscious firms to compete against brown firms and cooperate with green firms. However, disclosure regulation can hurt ESG outcomes if powerful firms do not value ESG, and it has little effect when market power is disperse.

Undergraduate Publications

  • Smith, S.R. and Riggs, A., 2012. Anomalies of Tax Legislation: The First-Time Homebuyer Credit. Journal of Business and Accounting, 5 (1): 103-111.

  • Smith, S.R. and Riggs, A., 2011. Temporary Tax Benefits Under Economic Stimulus Legislation: How Temporary? Journal of Business and Behavioral Sciences 23 (2).

  • Smith, S.R. and Riggs, A., 2010. Ethical and Public Policy Issues in Tax Legislation: The Case of the First-Time Homebuyer Tax Credit. Journal of Accounting, Ethics & Public Policy, 11 (2): 167-192.

  • Riggs, A. & Smith, S.R. (2010). Attributes of Good Tax Policy and the First-Time Homebuyer Credit. Tax Notes, 127 (5), 94-99.