Stanley Baiman

Professor Baiman’s area of research interest is the design of incentive mechanisms within firms and within supply chains. Among the topics which he has studied are the design of: multistage capital budgeting systems, internal transfer pricing systems, supply chain monitoring and contracting, and inventory buffers. He has published in: Journal of Accounting Research, Journal of Accounting and Economics, The Accounting Review, The Review of Accounting Studies, Accounting Organizations and Society, and Management Science. Professor Baiman received the Notable Contribution to Management Accounting Literature Award from the American Accounting Association in 2004. He is currently an Editor of The Review of Accounting Studies and has served on the editorial boards of: Journal of Accounting Research, Journal of Accounting and Economics, The Accounting Review, and Organizations and Society.

In addition to teaching an incentive contracting course in the doctoral program, Professor Baiman teaches financial accounting and managerial accounting in the undergraduate, MBA and Executive Education programs. Professor Baiman has been on the faculty of Carnegie Mellon University and the University of Pittsburgh and a visiting faculty member at Stanford University and the London School of Economics. He received his PhD. from the Graduate School of Business, Stanford University.

Stanley Baiman, Mirko S. Heinle, Richard Saouma (2013), Multistage Capital Budgeting with Delayed Consumption of Slack, Management Science, 59, pp. 869881.

Abstract: Capital budgeting frequently involves multiple stages at which firms can continue or abandon ongoing projects. In this paper, we study a project requiring two stages of investment. Failure to fund Stage 1 of the investment precludes investment in Stage 2, whereas failure to fund Stage 2 results in early termination. In contrast to the existing literature, we assume that the firm can limit the manager's informational rents with the early termination of the project. In this setting, we find that the firm optimally commits to a capital allocation scheme whereby it forgoes positive net present value (NPV) projects at Stage 1 (capital rationing), whereas at Stage 2, depending on the manager's previous report, it sometimes implements projects with a negative continuation NPV but in other situations forgoes implementing projects with positive continuation NPVs.

Stanley Baiman, Sasson BarYosef, Bharat Sarath (2011), Bilateral Incentive Problems and the Form of StartUp Financing , Bridging the GAAP: Recent Advances in Finance and Accounting, Edited by Itzhak Venezia and Zvi Weiner, forthcoming.

Stanley Baiman, Serguei Netessine, Richard Saouma (2010), Informativeness, Incentive Compensation, and the Choice of Inventory Buffer, Accounting Review, 85: 18391860.

Abstract: Previous research in management accounting and economics has noted the potential for complementarities between the firm's performance measurement system and its other organizational design choices. We add to this literature by studying how the informativeness and incentive properties of a performance metric can be influenced by one particular organizational design choice—the size of the firm's inventory buffers. We model a manufacturing setting in which an agent manages a workstation that processes intermediate units. As intermediate units arrive, they are stored in an inventory buffer until the agent can process them. The buffer can hold a maximum number of intermediate units—its buffer size. The agent is compensated on the basis of his workstation's throughput. We characterize the conditions under which reducing the inventory buffer enhances/degrades the informativeness of the performance metric and, hence, mitigates/exacerbates the agent's incentive problem.

Stanley Baiman and Tim Baldenius (2009), NonFinancial Performance Measures as Coordination Devices, Accounting Review, 84: 299 330.

Abstract: Previous research in management accounting and economics has noted the potential for complementarities between the firm's performance measurement system and its other organizational design choices. We add to this literature by studying how the informativeness and incentive properties of a performance metric can be influenced by one particular organizational design choice—the size of the firm's inventory buffers. We model a manufacturing setting in which an agent manages a workstation that processes intermediate units. As intermediate units arrive, they are stored in an inventory buffer until the agent can process them. The buffer can hold a maximum number of intermediate units—its buffer size. The agent is compensated on the basis of his workstation's throughput. We characterize the conditions under which reducing the inventory buffer enhances/degrades the informativeness of the performance metric and, hence, mitigates/exacerbates the agent's incentive problem.

Stanley Baiman, Paul Fischer, Madhav Rajan, Richard Saouma (2007), Resource Allocation Auctions Within Firms, Journal of Accounting Research, Vol. 45, December, pp. 915 – 946.

Abstract: There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve firstbest resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark secondbest outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve secondbest, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.

Stanley Baiman, Contract Theory Analysis of Managerial Accounting Issues (2006)

Stanley Baiman, Serguei Netessine, Howard Kunreuther (Working), Procurement in Supply Chains when the endproduct exhibits the “Weakest Link” property.

Stanley Baiman and Madhav Rajan (2002), The Role of Information and Opportunism in the Choice of BuyerSupplier Relationships, Journal of Accounting Research, Vol. 40, May, pp. 247 278.

Abstract: An important characteristic of any buyersupplier relationship is the amount and type of information that is exchanged between the contracting parties. Buyersupplier networks are characterized by greater information exchange than arm'slength transactions. This enhanced information exchange allows for greater production efficiency but increases the potential for information misappropriation. In this paper we characterize the set of innovations for which each of these forms of exchange relationships is efficient. We then explore the effect of an initial information linkage between the buyer and supplier. Such linkages increase the set of innovations for which networks are efficient. However, such linkages have a negative effect on the buyer's incentive to innovate and an ambiguous effect on the supplier's incentive to invest in flexible production techniques. Finally, we identify settings in which the buyersupplier surplus is greater with such linkages.

Stanley Baiman and Madhav Rajan (2002), Incentive Issues in InterFirm Relationship000179), Accounting, Organization and Society, Vol. 27, Number 3, April, pp. 213 – 238. 10.1016/S03613682(00)000179000179)

Abstract: The Wharton School, University of Pennsylvania, Accounting Department, Philadelphia, PA 19104, USA Available online 6 February 2002. Abstract This paper discusses the incentive problems to which buyersupplier transactions are subject and, by surveying the incentives literature, discusses some of the interfirm design instruments that can be used to mitigate these problems. Most of the literature discussed is based on the incomplete contracting model, which is better suited to analyzing interfirm issues. We also discuss some of the managerial accounting issues which are raised by this literature and suggest some managerial accounting issues for further research.

Stanley Baiman, Paul Fischer, Madhav Rajan (2001), Performance Measurement and Design in Supply Chains, Management Science, Vol. 47, No. 1, pp. 173 – 188.

Abstract: This paper examines the relationship between product architecture, supplychain performance metrics, and supplychain efficiency. We model the contracting relationship between a supplier and a buyer. The supplier is privately informed about the outcome of his design/production investment. The buyer both appraises the supplier's component and does further processing/component production of his own. If the final product produced by the buyer exhibits decoupling and no function sharing with respect to the components (termed separable architecture), the firstbest outcome is attained if both internal and external failures are contractible. When only one type of failure can be contracted on, we derive conditions under which contracting on internal failure is superior to contracting on external failure, and vice versa. If the buyer's final product has a nonseparable architecture with respect to the components, firstbest cannot be achieved even if both internal and external failures are contractible. The value of contracting on internal failure alone is unaffected by the architecture design, while that of external failure declines relative to the separable setting; the net result is often to make the former the uniformly dominant performance metric. Our results highlight the interaction between the performance metrics used for contracting within the supply chain, the architecture of the product produced by the supply chain, and the incentive efficiency of the chain.

Past Courses

ACCT101 PRINCIPLES OF ACCOUNTING

This course is an introduction to the basic concepts and standards underlying financial accounting systems. Several important concepts will be studied in detail, including: revenue recognition, inventory, longlived assets, present value, and long term liabilities. The course emphasizes the construction of the basic financial accounting statements the income statement, balance sheet, and cash flow statement as well as their interpretation.

ACCT102 MANAGERIAL ACCOUNTING

The first part of the course presents alternative methods of preparing managerial accounting information, and the remainder of the course examines how these methods are used by companies. Managerial accounting is a company's internal language, and is used for decisionmaking, production management, product design and pricing and for motivating and evaluating employees. Unless you understand managerial accounting, you cannot have a thorough understanding of a company's internal operations. What you learn in this course will help you understand the operations of your future employer (and enable you to be more successful at your job), and help you understand other companies you encounter in your role as competitor, consultant, or investor.

ACCT910 ACCT THEORY RESEARCH

The course includes an introduction to various analytical models and modeling/mathematical techniques that are commonly used in accounting research as well as related empirical applications.

Distinguished Lecturer in Accounting, Tepper School of Business, July 2008. I was asked to give 5 lectures to the accounting faculty and doctoral students of the Tepper School., 2008 Recipient 2005 Ohio State University chapter of Beta Alpha Psi, Distinguished Alumnus of the Year Award, May 2005, 2005 Recipient of the 2004 Notable Contribution to Management Accounting Literature Award, American Accounting Association for The Role of Information and Opportunism in the Choice of BuyerSupplier Relationships (with Madhav Rajan) Journal of Accounting Research Vol. 40, May 2002, pp. 247 – 278., 2004 EMTM Excellence in Teaching Award, 2003