Authority, Monitoring, and Incentives in Hierarchies

54 Pages Posted: 2 Jul 2016 Last revised: 14 Jan 2021

See all articles by Christian Hofmann

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Raffi Indjejikian

University of Michigan at Ann Arbor - Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: December 9, 2020

Abstract

We study three elements of management control: incentive compensation, performance monitoring, and delegation of authority to managers to contract with lower level employees. Using a principal-agent model, we highlight important direct and indirect interactions between and among these endogenous control elements, themes often emphasized in the economics and accounting literatures using the analogy of a three-legged stool. We identify circumstances where control elements are complements or substitutes and exhibit a coherent pattern of practices observed together. For instance, contrary to typical predictions that quality monitoring complements steep effort incentives, we find that when contracting authority adjusts easily to changes in firm circumstances, then both incentive pay and contracting authority substitute for monitoring quality, while incentive pay complements contracting authority. Overall, our findings suggest a number of empirical implications and generally inform a growing literature that documents the presence or absence of complementarities among management control elements.

Keywords: Hierarchy; Incentive; Monitoring; Multi-agent contracting; Performance evaluation

JEL Classification: L22, M12, M4

Suggested Citation

Hofmann, Christian and Indjejikian, Raffi J., Authority, Monitoring, and Incentives in Hierarchies (December 9, 2020). 27th Annual Conference on Financial Economics and Accounting Paper, AAA 2017 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=2802647 or http://dx.doi.org/10.2139/ssrn.2802647

Christian Hofmann (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Raffi J. Indjejikian

University of Michigan at Ann Arbor - Accounting ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

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