Authority and Accountability in Hierarchies

Abstract

We examine the assignment of authority to managers in corporate hierarchies and explore the link between authority and accountability that underlies responsibility accounting. We describe major activities of managers as “providing direction and support,” “monitoring performance,” and “hiring and contracting.” These activities enhance subordinates’ productivity, improve the quality of measures used to evaluate subordinate performance, and stipulate subordinates’ compensation contracts, respectively. In a stylized setting of a hierarchy, we illustrate how these three activities differ in the sense that a unique set of determinants dictate the optimal assignment of managerial authority. Our results suggest that “delegation of authority” is a far richer construct than is often portrayed in prior literature. We also consider how performance measure characteristics affect and are affected by assignment of managerial authority in hierarchies. For instance, we find that whether performance measures are aggregate or disaggregate affects the optimal assignment of authority along functional or product lines. We conclude with some suggestions for future research that seeks a closer examination of factors that drive assignment of authority in corporate hierarchies.