An information-based model for the differential treatment of gains and losses Academic Article uri icon

abstract

  • © 2018, Springer Science+Business Media, LLC, part of Springer Nature. This study defines reporting conservatism as a higher verification standard for probable gains compared to losses and builds a model that endogenously generates optimal behavior resembling an asymmetric preference for gains versus losses. Our model considers the setting where one party produces a resource and another tries to expropriate it. The key factor determining the extent of the gain-loss asymmetry is the level of information asymmetry or trust between the two parties. The information asymmetry-based results of our model provide a simpler explanation for the vast empirical literature on conservatism, where the bulk of the economic relationships among the parties appear to be information-based with little direct relation to explicit debt contracts, a factor that has been the focus of theoretical arguments. We also suggest new empirical analyzes.

author list (cited authors)

  • Nagar, V., Rajan, M. V., & Ray, K.

citation count

  • 3

publication date

  • April 2018