Authority, Monitoring, and Incentives in Hierarchies

Posted: 8 Feb 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: January 16, 2021

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 in which 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 (January 16, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3774073

Christian Hofmann

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

Kaulbachstr. 45
Munich, DE 80539
Germany

Raffi J. Indjejikian (Contact Author)

University of Michigan at Ann Arbor - Accounting ( email )

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

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