On the Role of Historical Cost Reporting.

This teaching note illustrates how reporting historical data, even when it is unverifiable, can be useful in improving productive efficiency. Historical cost accounting is evaluated in a simple multi-person setting with trading frictions in the form of restricted access to capital markets and private information. In one period these frictions result in no production and no use for cost reports. Surprisingly, repeated interactions allow improvements in productive efficiency and make cost reports valuable. Since the source of contracting frictions is not risk aversion, the analysis can be addressed using linear programming.