The role of budgeting in eliminating tacit collusion
Review of Accounting Studies · 1996 · Volume 1 · Issue 3
Abstract
While accounting textbooks emphasize the roles of budgeting in controlling and coordinating agents' activities, the principal-agent literature has focused primarily on the control aspect. Recent papers have studied the coordination aspect of budgeting in settings in which the agents are technologically dependent (sequential or joint production is considered). In this article, we develop a role for budgeting in coordination, despite the agents being technologically independent (individual production is considered). In our model, the principal uses relative performance evaluation to extract information rents from the agents. However, the use of relative performance evaluation results in a multiple equilibria (tacit collusion) problem. The value of budgeting procedures is derived from their ability to coordinate the agents to arrive at the right equilibrium.
Keywords
Performance Evaluation, Relative Performance, Individual Production, Multiple Equilibrium, Joint Production
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