Summary of Chapter #9: An Analysis of Conflict

Overview
Game theory, which models and predicts the outcome of conflict between rational people, is
necessary to fully understand economic consequences. Agency theory, a version of game theory that
looks at the process of contracting between two or more individuals, will also be considered.
Undoubtedly, economic consequences and agency theory contain conflict. Game theory can help us to
understand how managers, investors and other parties can deal with the economic consequences of
financial reporting and why contracts depend on financial statements.
Game Teory, yang model dan memprediksi hasil konflik antara orang yang rasional , perlu untuk memahami
konsekuensi ekonomi . Teori Agensi ,sebuah versi teori permainan yang terlihat pada proses kontrak antara dua
atau lebih individu , juga akan dipertimbangkan . Tidak diragukan lagi , konsekuensi ekonomi dan teori
keagenan mengandung konflik . Teori permainan dapat membantu kita untuk memahami bagaimana manajer ,
investor dan pihak lain dapat menghadapi konsekuensi ekonomi dari pelaporan keuangan dan mengapa
kontrak bergantung pada laporan keuangan .

Understanding Game Theory

Game theory is the basis of many current issues in accounting theory. It models the interactions
of two or more players in an environment of uncertainty and information asymmetry. As in decision
theory, each player is assumed to maximize their expected utility, however it requires that the players
consider the actions of other players. The action that one player chooses will depend on what action
that player thinks the other will take. Therefore, the actions of one player influence the others. This
defines the conflict aspect of the model.
Teori permainan adalah dasar dari banyak masalah saat ini dalam teori akuntansi . Ini model interaksi dari
dua atau lebih pemain dalam lingkungan ketidakpastian dan asimetri informasi . Seperti dalam teori
keputusan , setiap pemain diasumsikan memaksimalkan utilitas mereka diharapkan , namun mensyaratkan
bahwa pemain menganggap tindakan pemain lain . Tindakan yang satu pemain memilih akan tergantung pada

apa tindakan pemain yang berpikir yang lain akan mengambil . Oleh karena itu , tindakan satu pemain
mempengaruhi orang lain . Ini mendefinisikan aspek konflik model .

There are many different types of games. One way to distinguish them is as cooperative and
non-cooperative games. In a cooperative game, the parties can enter into a binding agreement, such as
a cartel. However, if this type of agreement were not possible, it would be a non-cooperative game,
such as an oligopolistic industry.
Ada berbagai jenis permainan . Salah satu cara untuk membedakan mereka adalah sebagai kooperatif dan
game non - kooperatif . Dalam permainan kooperatif , para pihak dapat masuk ke dalam perjanjian yang
mengikat , seperti kartel . Namun, jika jenis perjanjian yang tidak mungkin , itu akan menjadi non - kooperatif ,
seperti industri oligopolistik .

A Non-Cooperative Game Theory Model of Manager-Investor Conflict

Since the decision needs of different parties may not coincide, conflict between parties can be
modeled as a game. One example of this conflict may exist between investors and managers. Investors
want relevant and reliable financial information to assist them in assessing the risks and expected
returns of an investment. However, managers may not wish to reveal all information.
Karena kebutuhan keputusan pihak yang berbeda mungkin tidak bertepatan , konflik antara pihak dapat
dimodelkan sebagai permainan . Salah satu contoh dari konflik ini mungkin ada di antara investor dan manajer
. Investor menginginkan informasi keuangan yang relevan dan dapat diandalkan untuk membantu mereka
dalam menilai risiko dan pengembalian yang diharapkan dari investasi . Namun, manajer mungkin tidak ingin
mengungkapkan semua informasi .

Example 9.1: Manager-Investor Relations in a Non-Cooperative Game

The manager must chose between one of two strategies. He can choose distort (D) by under
investing in the internal control system or bias reported net income. The second choice is to choose
honest (H). The investor also has two strategies. He can either buy shares (B) in the managers firm
or refuse to buy shares (R).
Manajer harus memilih antara salah satu dari dua strategi . Dia bisa memilih " memutarbalikan " ( D ) oleh
bawah berinvestasi dalam sistem pengendalian intern atau bias yang melaporkan laba bersih . Pilihan kedua
adalah untuk memilih " jujur " ( H ) . Investor juga memiliki dua strategi . Dia baik dapat membeli saham ( B )
di perusahaan manajer atau menolak untuk membeli saham ( R ) .

Table 9.1 Utility Payoffs in a Non-Cooperative Game

Manager
HONEST (H)

DISTORT (D)

60, 40

20, 80

35, 20

35, 30

BUY (B)
Investor
REFUSE TO BUY (R)

Each party has complete information about the other. So, the investor knows the strategies and
payoffs available to the manager and vise versa. However, they must choose their strategy without
knowing the strategy the other party selected. Therefore, RD will be the strategy chosen. This is the
only pair in which each player is content with their strategy, even though both parties would be better
off if BH were chosen.
Masing-masing pihak memiliki informasi lengkap tentang yang lain . Jadi , investor tahu strategi dan hasil
tersedia untuk manajer dan sebaliknya . Namun, mereka harus memilih strategi mereka tanpa mengetahui
strategi pihak lain yang dipilih . Oleh karena itu , RD akan menjadi strategi yang dipilih . Ini adalah satu-

satunya pasangan di mana setiap pemain puas dengan strategi mereka, meskipun kedua belah pihak akan lebih
baik jika BH dipilih .

The fundamental point is that these models enable individuals to better understand the process
of accounting policy choice. Each party has their own interests at stake, which may conflict. Better
understanding of this conflict situation by accounting standard setters will result in more realistic
accounting policy choices.
Titik mendasar adalah bahwa model ini memungkinkan individu untuk lebih memahami proses pilihan
kebijakan akuntansi . Masing-masing pihak memiliki kepentingan mereka sendiri dipertaruhkan , yang mungkin
bertentangan . Pemahaman yang lebih baik dari ini situasi konflik dengan akuntansi pembuat standar akan
menghasilkan pilihan-pilihan kebijakan akuntansi yang lebih realistis .

Some Models of Cooperative Game Theory

Many areas of accounting exhibit cooperative behavior; players in a game situation can enter
into binding contracts.

The two main types of contracts are employment contracts and lending

contracts. In these contracts one party is the agent and the other is the principal. For instance, in an
employment contract, the owner of the firm is the principal, and the manager running the firm is
considered to be the agent. This is an example of Agency theory
Banyak daerah pameran akuntansi perilaku kooperativ; pemain dalam situasi permainan dapat masuk ke
dalam kontrak yang mengikat . Dua jenis utama dari kontrak kontrak kerja dan kontrak pinjaman . Dalam
kontrak ini salah satu pihak agen dan yang lainnya adalah pemilik. Misalnya , dalam kontrak kerja , pemilik
perusahaan adalah pokok , dan manajer menjalankan perusahaan dianggap agen . Ini adalah contoh dari
Agency Theory

Agency theory contracts can have characteristics of both cooperative and non-cooperative
games. Each party must play by the rules and commit to the contract, however they do not specifically
agree to take certain actions.
Badan teori kontrak dapat memiliki karakteristik dari kedua koperatif dan non - koperatif permainan . Masingmasing pihak harus bermain sesuai aturan dan berkomitmen untuk kontrak , namun mereka tidak secara khusus
setuju untuk mengambil tindakan tertentu .

Agency Theory: An Employment Contract between Owner and Manager

A firm consisting of a principal and an agent faces uncertainty, expressed in the form of random
states of nature. The agent has two possible actions; to work hard; or to slack off. The greater the
effort put into the operation by the agent, the higher the probability of the high payoff and the lower the
probability of the low payoff. However, it is unlikely the agents efforts could completely ensure the
high payoff, because some of the factors are beyond his or her control.
Sebuah perusahaan yang terdiri dari pemilik dan agen menghadapi ketidakpastian , dinyatakan dalam bentuk
negara random alam . Agen ini memiliki dua tindakan yang mungkin ; bekerja keras ; atau mengendur .
Semakin besar upaya dimasukkan ke dalam operasi oleh agen , semakin tinggi probabilitas hasil tinggi dan
rendah probabilitas hasil rendah. Namun, tidak mungkin upaya agen benar-benar bisa menjamin hasil yang
tinggi , karena beberapa faktor berada di luar kendalinya .

Effort is considered more than just the number of hours work; it is the care that the agent takes
in running the firm. The payoffs under each state of nature are assumed to be observable to both
parties.
Upaya dianggap lebih dari sekedar jumlah jam kerja ; itu adalah perawatan yang agen mengambil dalam
menjalankan perusahaan . The hadiah di bawah setiap keadaan alam diasumsikan diamati untuk kedua belah
pihak .

It is important to note that in game theory, one player will not choose an act desired by another
player because the player says so. Each party will choose the act that maximizes their own expected
utility.
Penting untuk dicatat bahwa dalam teori permainan , satu pemain tidak akan memilih tindakan yang diinginkan
oleh pemain lain karena pemain mengatakan demikian . Masing-masing pihak akan memilih tindakan yang
memaksimalkan utilitas yang diharapkan mereka sendiri .

Designing a Contract to Control Moral Hazard

The tendency of an agent to slack off because they are paid a set salary is an example of moral
hazard. The owner has two choices, to run the business themselves or to go out of business
Kecenderungan agen untuk mengendur karena mereka dibayar satu set gaji adalah contoh moral hazard .
Pemilik memiliki dua pilihan , untuk menjalankan bisnis sendiri atau untuk keluar dari bisnis .

The owner could observe the managers chosen act; the contract could be changed to pay the
manager a lower salary if an inferior action was chosen. This is an example of a first-best contract.
Unfortunately, this type of contract is often unattainable.

Thus, there is a case of information

asymmetry, the manager knows the extent of their effort, but the owner does not.
Pemilik bisa mengamati tindakan yang dipilihnya manajer ; kontrak bisa diubah untuk membayar manajer gaji
lebih rendah jika tindakan rendah dipilih . Ini adalah contoh dari pertama terbaik kontrak . Sayangnya , jenis
kontrak ini sering tak terjangkau . Dengan demikian , ada kasus asimetri informasi , manajer tahu sejauh mana
usaha mereka , tapi pemilik tidak .

It is possible for the owner to indirectly monitor the manager as well. This case could utilize
moving support, that is, the set of possible payoffs would move depending on which action is taken.
However, legal and institutional factors may prevent the owner from penalizing the manager to choose
a certain action.
Hal ini dimungkinkan untuk pemilik untuk tidak langsung memantau manajer juga. Kasus ini bisa
memanfaatkan bergerak dukungan , yaitu , himpunan mungkin hadiah akan bergerak tergantung pada tindakan
yang diambil . Namun , faktor hukum dan kelembagaan dapat mencegah pemilik dari menghukum manajer
untuk memilih tindakan tertentu .

The owner may be tempted to rent the firm to the manager, thus no longer caring which action
is chosen. This is referred to as internalizing the managers decision problem. The owner is riskneutral because a fixed rental is received. The manager is risk-averse and must bear all of the risk.
Pemilik mungkin tergoda untuk menyewa perusahaan dengan manajer , sehingga tidak lagi peduli mana
tindakan yang dipilih . Hal ini disebut sebagai internalisasi masalah keputusan manajer . Pemilik risiko - netral
karena sewa tetap diterima . Manajer menghindari risiko dan harus menanggung semua risiko .

As an alternative, the owner could give the manager a share of the payoff. The contract
provides motivation for the manager to choose the better action; this is referred to as incentivecompatibility. Hence, the interests of the two parties are aligned, as they both wish for the firm to do
well.
Sebagai alternatif , pemilik bisa memberikan manajer bagian dari imbalannya . Kontrak tersebut motivasi bagi
manajer untuk memilih tindakan yang lebih baik ; ini disebut sebagai insentif - kompatibilitas . Oleh karena
itu , kepentingan kedua pihak selaras , karena mereka berdua berharap bagi perusahaan untuk melakukannya
dengan baik .

In a second-best contract, the agency cost is the cost to the principal to motivate the agent by
means of a profit sharing contract. The manager would have to bear some risk to convince the owner
that the work-hard alternative would be chosen.
Dalam - terbaik kedua kontrak , biaya agensi adalah biaya untuk kepala sekolah untuk memotivasi agen dengan
cara kontrak bagi hasil . Manajer harus menanggung beberapa risiko untuk meyakinkan pemilik bahwa
alternatif kerja - keras akan dipilih .

Lender-Manager Agency Problem

The lender-manager agency problem is the second source of the moral hazard problem. This
arises from the fact that creditors cant usually observe the actions of managers of the firm they have
contracts with. Both the manager and the creditor want to maximize their total expected utility. In order
to prevent managers from manipulating accounting figures lenders, include covenants in their contracts
requiring managers to keep their debt-equity ratio at a certain level for example.
Masalah lembaga pemberi pinjaman - manajer adalah sumber kedua dari masalah moral hazard . Ini
muncul dari fakta bahwa kreditur tidak dapat biasanya mengamati tindakan manajer dari perusahaan mereka
memiliki kontrak dengan . Kedua manajer dan kreditur ingin memaksimalkan utilitas total yang diharapkan
mereka . Untuk mencegah manajer dari memanipulasi angka akuntansi kreditur , termasuk persyaratan dalam
kontrak mereka membutuhkan manajer untuk menjaga rasio utang - ekuitas mereka pada tingkat tertentu
misalnya.

The owner-manager and lender-manager agency examples illustrate that cooperation is better
for both parties involved. This feeds into the Positive Accounting Theory in that it provides an
incentive for managers to use accounting policies to manage their numbers, which in turn results in the
economic consequences discussed in chapter seven.
Contoh pemilik - manajer dan pemberi pinjaman - manajer lembaga menggambarkan bahwa kerjasama
yang lebih baik bagi kedua belah pihak yang terlibat . Ini feed ke dalam Teori Akuntansi Positif dalam
menyediakan insentif bagi manajer untuk menggunakan kebijakan akuntansi untuk mengelola jumlah mereka ,
yang pada gilirannya menghasilkan konsekuensi ekonomi yang dibahas dalam bab tujuh .

Implications of Agency Theory for Accounting

The two implications of agency theory for accounting are: measuring payoff and the rigidity of
contracts.
1. Measuring Payoff (hasil)
Since the principal (creditor) cant observe the agent (manager) the first-best options
of the contract may not be possible and so the best way to compensate a manager may be with a
share of the payoff. The payoff has to be observable by both parties and net income is used
most often.
Sejak pokok ( kreditur ) tidak dapat mengamati agen ( manajer ) "pertama - terbaik " pilihan
kontrak mungkin tidak dapat dilakukan dan cara terbaik untuk mengkompensasi manajer mungkin
dengan pangsa imbalannya . Imbalannya harus diamati oleh kedua belah pihak dan laba bersih yang
paling sering digunakan .

An alternative way of measuring payoffs is share price performance. However, this may
not be as reliable as net income because many factors that managers cant control, affect share
prices. According to the agency theory the more correlation there is between the payoff
measure and the managers amount of effort the better.
Cara alternatif hadiah mengukur adalah kinerja harga saham . Namun, ini mungkin tidak
dapat diandalkan sebagai laba bersih karena banyak faktor yang manajer tidak dapat mengendalikan ,
mempengaruhi harga saham . Menurut teori keagenan yang lebih korelasi ada antara ukuran hasil dan
jumlah manajer usaha yang lebih baik .

2. Rigidity of Contracts (Ketegasan Kontrak)

This second implication of the rigidity of contracts is based on the fact that not all
possible state realizations can possibly be anticipated at the time contracts are written up. These
contracts are known as being incomplete. Managers have to face the fact that contracts are hard
to renegotiate. If contracts could easily be renegotiated we would be back to the efficient
market theory that states accounting standards dont matter.
Ini Implikasi kedua dari kekakuan kontrak didasarkan pada kenyataan bahwa tidak semua
realisasi negara yang mungkin mungkin dapat diantisipasi pada saat kontrak ditulis . Kontrak ini
dikenal sebagai lengkap . Manajer harus menghadapi kenyataan bahwa kontrak sulit untuk
menegosiasikan kembali . Jika kontrak dengan mudah bisa dinegosiasi ulang kita akan kembali ke teori
pasar efisien yang menyatakan standar akuntansi tidak penting .

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Reconciliation of Efficient Securities Market Theory with Economic Consequences

As we saw with contracts, it is not the cash flow effect, but the incomplete contracts that cause
concern for managers. The covenants involved with these contracts are usually based on the
companys financial statement numbers, and hence they are concerned with accounting policies that
may affect these values.
Seperti yang kita lihat dengan kontrak , tidak efek arus kas , tetapi kontrak tidak lengkap yang
menyebabkan kekhawatiran bagi manajer . Perjanjian terlibat dengan kontrak ini biasanya berdasarkan
nomor laporan keuangan perusahaan , dan karenanya mereka prihatin dengan kebijakan akuntansi yang
dapat mempengaruhi nilai-nilai ini

So we see a reconciliation of the efficient securities market theory and the economic
consequences. Managers may very well intervene with accounting policies even if that would mean
better information for investors, hence creating a game between them.
Jadi kita melihat rekonsiliasi teori pasar sekuritas efisien dan konsekuensi ekonomi . Manajer mungkin
sangat baik mengintervensi dengan kebijakan akuntansi bahkan jika itu berarti informasi yang lebih baik
bagi investor , sehingga menimbulkan pertandingan antara mereka .

Some other explanations for economic consequences other than game theory are:
1) Managers do not believe in security market efficiency
2) Managers do accept market efficiency but want to use accounting standard choices as a way
to convey inside information
3) Competitive disadvantage due to disclosures (Darrough & Stoughton
Beberapa penjelasan lain untuk konsekuensi ekonomi selain teori permainan adalah:
1 ) Manajer tidak percaya pada efisiensi pasar keamanan
2 ) Manajer melakukan menerima efisiensi pasar tetapi ingin menggunakan pilihan standar akuntansi sebagai
cara untuk menyampaikan informasi dalam
3 ) Kerugian kompetitif karena pengungkapan ( Darrough & Stoughton )

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Questions
Multiple Choice
1. Which one of the following are implications of agency theory for accounting?
a) Measuring payoff and Holtrms agency model
b) Measuring payoff and rigidity of contracts
c) Ambiguity of contracts and rigidity of contracts
d) Ambiguity of contracts and management manipulation
e) None of the above
2. Contracts that do not anticipate all possible state realizations are said to be:
a) Unpredictable
b) Unreliable
c) Incomplete
d) Both a and c
e) All of the above
3. A cartel is an example of a:
a) Nash Agreement
b) Non-Cooperative Game
c) Agency Contract
d) Cooperative Game
e) None of the above
4. Identify which statement is incorrect regarding the economic theory of games:
a) Each party has complete information about the other party.
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b) Each player is assumed to maximize his or her expected utility

c) Players utility payoffs are unknown to other players.
d) A and B
e) A and C
f) All are correct
5. In an employment contract, the firm owner is the principal and the top manager is the _________
hired to run the firm on the owners behalf.
a) Adversary
b) Cooperative
c) Agent
d) None of the above
6. The payoffs associated with the various states of nature are:
a) Observable to both parties
b) Observable to only one party
c) Observable to neither party
d) None of the above

Short Answer
1. Given the following information will the lender be willing to lend $125 to firm A?
Assume there is a .6 probability of Option 1 being chosen and .4 probability that
Option 2 will be chosen.
FIRM'S
ACT
Option 1

Interest paid
Bankrupt

Payoff
$15
-$110

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Option 2
Probabilit
y
0.95
0.05

Payoff
$15
-$110

Probability
0.8
0.2

2. Identify the two sources of the moral hazard problem discussed in this chapter and what kind of
game theory they are.
3. How might you be able to argue that net income is not a credible way to measure payoffs for
managers?
4. Discuss any differences that exist between game theory and single-person decision theory.
5. Given the utility payoffs in a non-cooperative game in table 9.1, RD (Distort Refuse to Buy)
will be the strategy chosen. However, both parties would be better off if BH (Buy-Honest) were
chosen. What can be done so that the investor and manager attain the BH strategy pair?
6. What is information asymmetry?

Solutions
Multiple Choice
1.

2.

3.

4.

5.

6.

Short Answer
1. Expected Total Return = 0.6(15 x 0.95 110 x 0.05) + 0.4(15x 0.8 110x0.2)
= 0.6(8.75) + 0.4(-10)
= 5.25 + (-4.0)
= 1.25
2. The two sources of the moral hazard problem are employment contracts between the firm and
management, and the lending contract between the firm manager and a creditor. These two are
models of the cooperative game theory in contrast to non-cooperative.
3. Net income may be seen as not credible for measuring payoff because the payoff has to be
observable by both parties, the principal and the agent. In the case of the lender and manager,
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there could be the question as to whether the lender trusts the manager to be disclosing the
accounting figures or that they may be playing with the numbers. Hence, you could argue that
this question of intent behind the net income figure could cause some people to conclude that it
is not a credible number to base payoffs on.
4. There are three main differences between game theory and single-person decision theory.
a) The difference is that game theory, in addition to taking into account any uncertainty
arising from random realization of states of nature, requires that the players formally
take the actions of the other players into account. Therefore, game theory tends to be
more complex than decision theory.
b) The actual number of players in game theory lies in between the number in singleperson decision theory and in markets. In decision theory, there is a single player,
playing a game against nature. At the other extreme, a market is a game with a large
number of players.
c) The assumption in decision theory is that the high or low payoffs are generated by some
random mechanism called nature. However, in game theory the payoffs are generated
by a thinking component.
5. There are a number of things that can be done so that the investor and manager attain the BH
strategy pair. First, the two parties could get together and enter into a binding agreement to
choose BH. However, the investor would have to be convinced the agreement is binding and
could be enforced. A second possibility would be to change the payoffs of the game, by
introducing severe penalties for distortion. A third approach would be to look at the long-run
perspective. If the game was repeated many times and the manager always chose H, a
reputation for honesty would be established and investors would start choosing B.
6. Information asymmetry is when one party has access to information that the other party does
not. An example of this is when a manager knows the effort level that they have invested into
the company, while the owner/investor does not.

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