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| Author: | Mookherjee, D. Reichelstein, S. |
| Title: | Budgeting and hierarchical control |
| Journal: | Journal of Accounting Research
1997 : AUTUMN, VOL. 35:2, p. 129-155 |
| Index terms: | BUDGETING HIERARCHICAL ORGANIZATIONS CONTROL |
| Language: | eng |
| Abstract: | A variety of hierarchical arrangements can be equally effective in creating incentives and coordinating decisions, provided the organization uses an appropriate responsibility accounting system. The aggregate cost incurred by an agent's direct and indirect subordinates must be available to measure agent's performance. Each agent's budget must be verifiable information that the agent can use in contracting with his subordinates. The main result relies on the assumptions of risk neutrality and the absence of "bankruptcy" constraints. Under the budget mechanism only agents at the bottom of the hierarchy are schielded from the uncertainty associated with the costs of other agents, so their participation constraints will be satisfied ex post rather than only in expectation. Payments to intermediate agents vary with the costs of their subordinates. |
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