Management Accounting Section Midyear Meeting

Transparency in Hierarchies

• In Event: Employees and Teams

Abstract

We examine how accounting practices that render performance accomplishments transparent within an organization comport with the assignment of decision-making authority to hierarchical ranks. We consider a principal-agent model where the principal either contracts with all parties directly in a centralized organization or tasks an agent-manager to contract with agent-workers in a decentralized organization. We portray performance transparency in terms of costly output precision or output observability by co-workers. We find that output precision in the decentralized organization exceeds output precision in the centralized organization and we identify conditions where output observability is optimally restricted in the decentralized organization. We also find that relative performance evaluation is less prevalent in the decentralized organization. Collectively, our study contributes to the literature that document complementary or substitute relations among organizational design choices.

Authors

• Christian Hofmann, Ludwig-Maximilians-Universitaet

• Raffi J Indjejikian, University of Michigan-Ann Arbor