Reporting Frequency and Substitutable Tasks

Abstract

The optimal reporting frequency is an important issue in accounting. In many production settings, substitution effects across periods occur. This paper shows that the optimal reporting frequency depends on the strength of the substitution effect and on the information content of performance signals. For a subset of parameter combinations - the low-chance scenario - infrequent reporting is always efficient; for other parameter combinations – the high-chance scenario - infrequent reporting is efficient as long as first-period signals show high informativeness (and substitution effects are strong). Limited commitment by the principal does not influence results.