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Budgeting and Hierarchical Control

Listed author(s):
  • Mookherjee, D.
  • Reichelstein, S.

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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Paper provided by Boston University - Industry Studies Programme in its series Papers with number 71.

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Length: 31 pages
Date of creation: 1996
Handle: RePEc:fth:bostin:71
Contact details of provider: Postal:
Boston University, Industry Studies Program; Department of Economics, 270 Bay Road, Boston, Massachusetts 02215.

Phone: 617-353-4389
Fax: 617-353-4449
Web page: http://www.bu.edu/econ/isp/
Email:


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  1. Bliss, C. J., 1975. "Capital Theory and the Distribution of Income," Elsevier Monographs, Elsevier, edition 1, number 9780720436044 edited by Bliss, C. J..
  2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
  3. repec:bla:joares:v:22:y:1984:i:1:p:177-191 is not listed on IDEAS
  4. repec:bla:joares:v:29:y:1991:i:1:p:109-128 is not listed on IDEAS
  5. Martin L. Weitzman, 1976. "The New Soviet Incentive Model," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 251-257, Spring.
  6. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
  7. William P. Rogerson, 1987. "On the Optimality of Menus of Linear Contracts," Discussion Papers 714, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
  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.
  12. Hammer, Michael & Champy, James, 1993. "Reengineering the corporation: A manifesto for business revolution," Business Horizons, Elsevier, vol. 36(5), pages 90-91.
  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.
  15. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
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