The Controllability Principle in Responsibility Accounting: Another Look

Anil Arya, Jonathan Glover and Suresh Radhakrishnan
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Anil Arya: The Ohio State University
Jonathan Glover: Carnegie Mellon University
Suresh Radhakrishnan: Univeristy of Texas

Chapter Chapter 9 in Essays in Accounting Theory in Honour of Joel S. Demski, 2007, pp 183-198 from Springer

Abstract: 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.

Keywords: Responsibility; Accounting; and; Controllability (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-30399-4_9

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DOI: 10.1007/978-0-387-30399-4_9

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