Income Smoothing as Rational Equilibrium Behavior? A Second Look: A Response
The Accounting Review · 2020 · Volume 95 · Issue 5
Abstract
This paper responds toHemmer's (2020)critique ofLambert's (1984)paper on income smoothing. Lambert develops and analyzes a two-period agency model in which he shows income smoothing, defined as the second-period action being a decreasing function of the first-period outcome, is part of the equilibrium. Hemmer claims Lambert's analysis contains errors, and that income smoothing does not occur in the model for the reasons Lambert claims. Here, I confirm the Lambert results, show why Hemmer's results appear different than mine, and make clearer the economic forces behind why income smoothing occurs.
Keywords
income smoothing, incentives, contracting
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