Importance of Setting and Stating the Input Target for Organizational Control

Abstract

This study uses the contract theory and investigates (1) whether an input target aids in organizational control, and (2) whether the principal decentralizes the decision right of target-setting to the agent based on the psychological attributes of the agent and planning costs of the principal. The study tries to extend existing accounting studies about organizational control by introducing psychological features.

This study shows that (1) setting an input target is useful for organizational control; (2) appropriateness of decentralization depends on the level of planning cost, and (3) when the agent has low adherence to the input target, or when the agent has high congruity with the principal’s idea, decentralization of decision right of target-setting to the agent is preferable. These results indicate that both top-down and bottom-up organizations can exist. Moreover, while these results are consistent with traditional discussions in accounting, the reasons vary. Thus, this study provides another perspective to the theory of decentralization.