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Budgeting and Hierarchical Control

Author

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  • Dilip Mookherjee
  • Stefan Reichelstein

Abstract

This paper develops a model of budgeting in hierarchical organizations. Each agent (manager) in the hierarchy receives a budget for a task; based on his own information, the agent assigns tasks and budgets to his subordinates, who, in turn, do the same for their subordinates and so forth. Each department's performance is measured by the difference between budgeted and actual cost. In this setting we show that a particular budget mechanism is optimal in terms of the incentives it creates and the coordination it achieves.
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Suggested Citation

  • Dilip Mookherjee & Stefan Reichelstein, 1996. "Budgeting and Hierarchical Control," Papers 0071, Boston University - Industry Studies Programme.
    • Handle: RePEc:fth:bostin:0071
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    Cited by:

    1. Faure-Grimaud, Antoine & Martimort, David, 2001. "On some agency costs of intermediated contracting," Economics Letters, Elsevier, vol. 71(1), pages 75-82, April.
    2. Staci A. Kenno & Michelle C. Lau & Barbara J. Sainty, 2018. "In Search of a Theory of Budgeting: A Literature Review," Accounting Perspectives, John Wiley & Sons, vol. 17(4), pages 507-553, December.
    3. Grüner, Hans Peter, 2007. "Protocol Design and (De-)Centralization," CEPR Discussion Papers 6357, C.E.P.R. Discussion Papers.
    4. Madhav V. Rajan & Stefan Reichelstein, 2004. "ANNIVERSARY ARTICLE: A Perspective on ÜAsymmetric Information, Incentives and Intrafirm Resource AllocationÝ," Management Science, INFORMS, vol. 50(12), pages 1615-1623, December.
    5. Grüner, Hans Peter & Schulte, Elisabeth, 2010. "Speed and quality of collective decision making: Incentives for information provision," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 734-747, December.
    6. Andreas Roider, 2006. "Delegation of Authority as an Optimal (In)Complete Contract," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 391-411, September.
    7. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December.
    8. Hans Peter Grüner, 2010. "Speed and Quality of Collective Decision Making: Incentives for Information Provision," Post-Print hal-00911831, HAL.
    9. Hans Peter Grüner & Elisabeth Schulte, 2004. "Speed and Quality of Collective Decision Making: Incentives for," Levine's Bibliography 122247000000000417, UCLA Department of Economics.
    10. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
    11. van Pelt, Victor, 2019. "A dynamic view of management accounting systems," Other publications TiSEM 782413b7-2830-4e6d-bc4c-3, Tilburg University, School of Economics and Management.
    12. Grüner, Hans Peter, 2009. "Information technology: Efficient restructuring and the productivity puzzle," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 916-929, December.
    13. Ulf Schiller, 2001. "Vom Nutzen (un-)informierter Agenten: Eine informationsökonomische Betrachtung des Controllings," Schmalenbach Journal of Business Research, Springer, vol. 53(1), pages 3-19, February.
    14. Grüner, Hans Peter, 2007. "Information Technology, Efficient Restructuring and the Productivity Puzzle," CEPR Discussion Papers 6109, C.E.P.R. Discussion Papers.
    15. Aude Deville & Gary D. Ferrier & Hervé Leleu, 2009. "Performance measures for hierarchical organizations: Frontier analysis as a decision support tool," Working Papers 2009-ECO-01, IESEG School of Management.
    16. Pinghan Liang, 2017. "Transfer of authority within hierarchies," Review of Economic Design, Springer;Society for Economic Design, vol. 21(4), pages 273-290, December.
    17. Andrey Malenko, 2011. "Optimal Design of Internal Capital Markets," 2011 Meeting Papers 442, Society for Economic Dynamics.
    18. Anil Arya & John Fellingham & Jonathan Glover & K. Sivaramakrishnan, 2000. "Capital Budgeting, the Hold-up Problem, and Information System Design," Management Science, INFORMS, vol. 46(2), pages 205-216, February.

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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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