On the Upsides of Aggregation

Abstract

ABSTRACTAggregation, and minimizing associated information loss, is a pervasive theme in accounting. In contrast, this paper highlights some potential benefits of aggregation, using simple examples to illustrate ideas from a number of recent papers in a parsimonious manner. Aggregation rules can improve decision making because of their ability to convey appropriate information and because such rules may permit offsetting errors. Turning to control problems, aggregation has merit in the provision of both explicit and implicit incentives. Contracts based on aggregate measures can be part of a conservative process that limits opportunities for cherry-picked corrections by evaluatees, serve as a substitute for the principal's commitment, curb managerial slack by delaying information release, and improve the production versus rents tradeoff by reducing information asymmetry. In the context of implicit incentives, we examine settings wherein effort incentives are provided by the marketplace and/or by an agent's own peers. In light of career concerns and the possibility of mutual monitoring by colleagues, aggregate measures again prove beneficial.