Knowledge Transfer Costs and the Costs of Inconsistent Objectives as Determinants of Financial Reporting in the Public Sector

Abstract

Jensen and Meckling (1992, 1995) suggest that decentralisation by a firm is determined by knowledge transfer costs and control costs, including the costs of inconsistent objectives. This idea is applicable to the public sector as well as to the private sector. Christie, et al. (1993) find evidence (in the private sector) consistent with these predictions. I hypothesise that the use of audited financial statements and reports on service performance in the New Zealand public sector is a consequence of decentralisation, and will be associated with the presence of high knowledge transfer costs, and low costs of inconsistent objectives. The evidence is consistent with my predictions, and is robust to alternative ways of measuring variables.

JEL Classification: M41, M46, H11, L23