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Budgeting and Hierarchical Control


  • Dilip Mookherjee


  • Stefan Reichelstein


This paper develops a model of budgeting in hierarchical organizations. Each agent (manager) in the hierarchy receives a budget for a task; based on his own information, the agent assigns tasks and budgets to his subordinates, who, in turn, do the same for their subordinates and so forth. Each department's performance is measured by the difference between budgeted and actual cost. In this setting we show that a particular budget mechanism is optimal in terms of the incentives it creates and the coordination it achieves.
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Suggested Citation

  • Dilip Mookherjee & Stefan Reichelstein, 1996. "Budgeting and Hierarchical Control," Papers 0071, Boston University - Industry Studies Programme.
  • Handle: RePEc:fth:bostin:0071

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    References listed on IDEAS

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    9. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
    10. Stanley Reiter, 1995. "Coordination and the Structure of Firms," Discussion Papers 1121, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
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    13. Melumad, Nahum & Mookherjee, Dilip & Reichelstein, Stefan, 1992. "A theory of responsibility centers," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 445-484, December.
    14. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-1146, September.
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    Cited by:

    1. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
    2. Grüner, Hans Peter, 2007. "Information Technology, Efficient Restructuring and the Productivity Puzzle," CEPR Discussion Papers 6109, C.E.P.R. Discussion Papers.
    3. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December.
    4. Grüner, Hans Peter, 2007. "Protocol Design and (De-)Centralization," CEPR Discussion Papers 6357, C.E.P.R. Discussion Papers.
    5. Andreas Roider, 2006. "Delegation of Authority as an Optimal (In)Complete Contract," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 391-411, September.
    6. Hans Peter Grüner & Elisabeth Schulte, 2004. "Speed and Quality of Collective Decision Making: Incentives for," Levine's Bibliography 122247000000000417, UCLA Department of Economics.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General


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