Resolution of Information Asymmetry in Management Accounting : A Game Theoretic Way

Information asymmetry has been a critical issue in management accounting. Non-co-linearity of interests among market participants brings forth this problem. As a decision making tool, firms should leverage out the benefits of management accounting system to encounter this problem, as it has a direct impact on the financial performance of firms. Since reduction of information asymmetry comes with a cost, firms should make an optimized way to balance the costs and benefits. Contracting parties consider this cost and enter into a game, driven by information asymmetry. Equilibrium outcomes of these games can be achieved in non-cooperative and cooperative ways. This paper proposes a model based on dictator game to encounter prevailing problem regarding information asymmetry given the no-negotiating behavior of transacting parties. This model takes into account the price elasticity of accounting information, quantum of available accounting information and expected utility level achieved by principal and agent. Suggested optimal negotiating behavior can result in reduction of information asymmetry prevailing between transacting parties. Roles of management, accountants and competitors are suggested hereafter in accordance with the solution provided by the model