On Cost Tradeoffs Between Conservative and Market Value Accounting |
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Authors: | Bachar Joseph Melumad Nahum D Weyns Guy |
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Institution: | (1) Arthur Andersen, Israel |
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Abstract: | We identify a cost tradeoff relevant to the comparison of alternative accounting regimes. We compare equilibrium deadweight losses, due to transacting and auditing, across the historical cost, lower-of-cost-or-market, and market value regimes. We provide conditions for each of the regimes to dominate the other two. We show that while market-value accounting is likely to prevail in an inflationary setting, it may also be optimal under deflation. Similarly, lower-of-cost-or-market is likely to prevail in a deflationary setting, though it may also be optimal under inflation. Last, historical cost prevails only if the variation in asset prices is sufficiently high. |
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