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The Controllability Principle in Responsibility Accounting: Another Look

In: Essays in Accounting Theory in Honour of Joel S. Demski

Author

Listed:
  • Anil Arya

    (The Ohio State University)

  • Jonathan Glover

    (Carnegie Mellon University)

  • Suresh Radhakrishnan

    (Univeristy of Texas)

Abstract

In this paper, we illustrate some subtleties related to responsibility accounting by studying two settings in which there are interactions among multiple control problems. In the first setting, two agents are involved first in team production (e.g., coming up with ideas) and then in related individual production (e.g., implementing the ideas). We provide conditions under which the agents are not held responsible for the team performance measure, despite each agent conditionally controlling it. The conditions ensure the incentive problem related to individual production is so severe it drives out any demand for the team performance measure. The team incentive problem is not binding because of the large “spillback” from the individual problem to the team problem. In the second setting, we provide conditions under which an agent is held responsible for a variable he does not conditionally control. Conditional controllability is a notion derived for one-sided moral hazard. Our model is instead one of two-sided moral hazard. Under two-sided moral hazard, it can be optimal for an agent’s pay to depend on variables conditionally controlled by the principal. This serves as a substitute for commitment by the principal.

Suggested Citation

  • Anil Arya & Jonathan Glover & Suresh Radhakrishnan, 2007. "The Controllability Principle in Responsibility Accounting: Another Look," Springer Books, in: Rick Antle & Frøystein Gjesdal & Pierre Jinghong Liang (ed.), Essays in Accounting Theory in Honour of Joel S. Demski, chapter 0, pages 183-198, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-30399-4_9
    DOI: 10.1007/978-0-387-30399-4_9
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    Cited by:

    1. Rajiv Jayanth & Varghese S. Jacob & Suresh Radhakrishnan, 2011. "Vendor and Client Interaction for Requirements Assessment in Software Development: Implications for Feedback Process," Information Systems Research, INFORMS, vol. 22(2), pages 289-305, June.
    2. Richardson, Vernon J. & Sanchez, Juan Manuel & Setia, Pankaj & Smith, Rodney, 2018. "Determinants and consequences of chief information officer equity incentives," International Journal of Accounting Information Systems, Elsevier, vol. 31(C), pages 37-57.
    3. Min Chen & Varghese S. Jacob & Suresh Radhakrishnan & Young U. Ryu, 2015. "Can Payment-per-Click Induce Improvements in Click Fraud Identification Technologies?," Information Systems Research, INFORMS, vol. 26(4), pages 754-772, December.

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