Budgeting and Hierarchical Control

Posted: 12 Jun 1997

See all articles by Dilip Mookherjee

Dilip Mookherjee

Boston University - Department of Economics

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: Undated

Abstract

This paper studies incentives in hierarchical organizations. Benchmark performance is given by the optimal revelation mechanism in which the principal communicates and contracts directly with all agents. We analyze under what conditions a general multi-tier hierarchy can replicate the performance of the optimal revelation mechanism. We find that replication is possible if the hierarchical arrangement of the agents is consistent with the underlying production structure, and the organization sets up a suitable internal accounting system. Specifically, each department manager is given a budget by his superior for a specific departmental task. Performance is then measured by the difference between the budget and actual cost incurred by the department.

JEL Classification: D82, L23, M40, M46

Suggested Citation

Mookherjee, Dilip and Reichelstein, Stefan J., Budgeting and Hierarchical Control (Undated). Available at SSRN: https://ssrn.com/abstract=8503

Dilip Mookherjee

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4392 (Phone)
617-353-4143 (Fax)

Stefan J. Reichelstein (Contact Author)

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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