# Jae Theory Development > Use when building the economic argument and predictions for a Journal of Accounting and Economics (JAE) manuscript — grounding hypotheses in agency, information-economics, contracting, or disclosure theory so the paper applies economic theory to explain accounting phenomena rather than reporting a bare correlation. - Skill: `thedixitjain/jae-theory-development` (Agent Skill) - Install (CLI): `npx skillmds add thedixitjain/jae-theory-development` - Raw SKILL.md: https://api.skillmd.com/api/skills/thedixitjain/jae-theory-development/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Research & Search - Author: thedixitjain (https://skillmd.com/u/thedixitjain) - Updated: 2026-09-08 - Page: https://skillmd.com/skills/thedixitjain/jae-theory-development --- # Theory Development for JAE (jae-theory-development) ## When to trigger - Your predictions read as "A is associated with B" with no economic logic - A reviewer asks "what is the economic mechanism?" or "why would a rational agent do this?" - You have a result but no model of the friction generating it - You are deciding whether to support predictions with an analytical model or with cited economic theory ## JAE's theory bar: apply economics to accounting JAE exists to **apply economic theory to explain accounting phenomena**. A prediction must follow from an economic primitive, not from intuition. The canonical building blocks are: - **Agency theory** (Jensen-Meckling): contracting and monitoring of manager-shareholder and shareholder-creditor conflicts; accounting numbers as inputs to compensation and debt contracts. - **Information economics / disclosure theory** (Grossman-Hart-Milgrom unraveling; Verrecchia, Diamond-Verrecchia): when and why managers disclose, and the price/liquidity consequences of information asymmetry. - **Positive Accounting Theory** (Watts & Zimmerman, the founding editors): the bonus, debt-covenant, and political-cost determinants of accounting choice. - **Contracting cost and the theory of the firm**: efficient-contracting explanations for accounting conservatism, recognition, and verifiability. Your job is to derive a **directional, falsifiable prediction** from one of these, naming the agents, their objectives, the constraint, and the equilibrium behavior accounting affects. ## Build the argument 1. **State the friction.** Information asymmetry between whom? Which agency conflict? What contracting/regulatory constraint? 2. **Name the economic actors and incentives.** Managers, shareholders, creditors, analysts, auditors, regulators — each with an objective function. 3. **Derive the prediction.** Show how the friction plus incentives imply a sign on the relation; predictions are *a priori*, not reverse-engineered from the data. 4. **Specify cross-sectional variation.** JAE prizes partitioning tests: the effect should be stronger where the friction is more severe (e.g., higher information asymmetry, tighter covenants, weaker governance) — this is your sharpest evidence of mechanism. ## Micro-rewrite: from association to economic hypothesis - **Before**: "H1: Accounting conservatism is positively associated with debt financing." — a sign with no agents, no friction, and no way to distinguish an equilibrium from a coincidence. - **After**: "Creditors hold payoffs concave in firm value and cannot observe managerial actions, so they price protection they cannot fully contract on; timely loss recognition substitutes for costly direct monitoring. H1: After a shock that raises creditor monitoring demand, borrowers increase conditional conservatism, and the increase concentrates in firms with the least covenant slack." — the friction (asymmetric payoffs plus unobservable actions), the actors (creditors and borrowers), an a priori sign, and the mechanism partition are on the table before any regression runs. ## Opportunism vs. efficient contracting: pick a side Positive-accounting predictions come in two flavors that JAE referees will force apart: **opportunism** (managers exploit reporting discretion for bonus, covenant, or political reasons) and **efficient contracting** (the same accounting choice minimizes contracting costs ex ante, anticipated and priced by counterparties). Both often predict the same first-order sign; they separate in the cross-section and in consequences — pricing penalties, contract redesign, turnover follow opportunism, not efficiency. Declare which interpretation your evidence supports and build at least one test that could tell them apart; a paper that never confronts the efficiency alternative reads as half a theory at this venue. ## A hypothesis table before the data Keep a one-row discipline per hypothesis: friction → actors → predicted sign → cross-sectional partition → rival explanation it excludes. A blank cell means the hypothesis is not yet derived; two hypotheses sharing every cell are one hypothesis. ## Analytical vs. archival theory JAE publishes both economics-style **analytical models** (clean assumptions, propositions, proofs in an appendix) and **archival** papers whose theory is cited rather than modeled. If your contribution is the model itself, develop it formally; if the contribution is empirical, ground the hypotheses in existing economic theory and reserve formal modeling for the appendix. ## Checklist - [ ] Each prediction derives from an economic primitive (agency / information / contracting / political cost) - [ ] Economic actors, objectives, and the friction are explicitly named - [ ] Predictions are directional, falsifiable, and *a priori* - [ ] Cross-sectional partitions tie effect size to friction severity - [ ] Analytical claims have stated assumptions and proofs; archival claims cite the theory - [ ] Alternative economic explanations are anticipated, not ignored ## Anti-patterns - **Atheoretical correlation** dressed as a hypothesis. - **HARKing** — predictions reverse-engineered after seeing the regression. - **Behavioral hand-waving** ("managers feel...") where an economic incentive argument is expected. - **Normative claims** ("the standard should require...") instead of positive predictions. - **No cross-sectional mechanism test**, leaving the main result observationally equivalent to alternatives. ## Output format ``` 【Friction】information asymmetry / agency / contracting cost / political cost 【Actors & incentives】... 【Prediction (sign, a priori)】H1 ... 【Cross-sectional partition】effect stronger when friction X is severe 【Modeled or cited?】analytical model / economic theory cited 【Rival explanations to rule out】... 【Next step】jae-literature-positioning ``` --- **Source:** [`brycewang-stanford/Awesome-Journal-Skills`](https://github.com/brycewang-stanford/Awesome-Journal-Skills) → `Journal-of-Accounting-and-Economics-Skills/skills/jae-theory-development/SKILL.md`