An Agency Theoretic Formulation of Organizational Control Theory

43 Pages Posted: 16 Aug 2010

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Shaopeng Li

Independent

Jose M. Plehn-Dujowich

Powerlytics. Inc.

Date Written: August 16, 2010

Abstract

We propose an analytical model that integrates two parallel independent streams of the literature, agency theory and organizational control theory. In doing so, we provide new insights into agency theory by introducing the concept of a congruent agent, and new insights into organizational control theory by using contracting tools to model behavior and outcome forms of controls. We study outcome-based control, i.e. contracting on the outcome; behavior-based control, i.e. contracting on a signal of effort; and clan control. To interpret clan control in the context of agency theory, we draw from experimental evidence in behavioral economics by distinguishing between two types of agents: a self-interested agent, who behaves in the traditional fashion; and a congruent agent, who cares about the principal’s payoff, which can be viewed as a form of “social” preferences in behavioral economics and a form of clan control resulting from “socialization” in organization theory. Corresponding to Ouchi’s (1979) view of organizational control, we derive analytical conditions under which outcome-based control with a self-interested agent, behavior-based control with a self-interested agent, and clan control with a congruent agent are optimal. We make the following contributions. First, we introduce to agency theory a new form of organizational control based on shared values and goals. Second, we provide new insights to organization theory by modeling the structure of the optimal compensation contracts corresponding to each form of control and the properties of the conditions under which each form of control is optimal as they relate to the characteristics of the agency relationship.

JEL Classification: M40, M46

Suggested Citation

Banker, Rajiv D. and Li, Shaopeng and Plehn-Dujowich, Jose M., An Agency Theoretic Formulation of Organizational Control Theory (August 16, 2010). Available at SSRN: https://ssrn.com/abstract=1659969 or http://dx.doi.org/10.2139/ssrn.1659969

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Shaopeng Li

Independent

No Address Available

Jose M. Plehn-Dujowich (Contact Author)

Powerlytics. Inc. ( email )

P.O. Box 164
Mechanicsville, PA 18934
United States

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