Transparency in Hierarchies

Year: 2023
Type: Journal Publication
Journal: Journal of Accounting Research


We use an agency model to address the benefits and costs of transparency in a hierarchical organization in which the principal employs a manager entrusted with contracting authority and several workers, all under conditions of moral hazard. We define the principal’s transparency choices as a decision to allow workers to observe their co-workers’ performances (observability) and as an investment in monitoring worker performance (precision). We find that whereas precision alleviates agency conflicts as expected, observability can exacerbate agency conflicts, especially if the manager’s interests are misaligned sufficiently with those of the principal. Our results suggest several testable hypotheses including predictions that opaque performance measurement practices are well suited for small organizational units at lower hierarchical ranks, and in settings where the sensitivity-precision of the available measures is low, workers’ performances are correlated positively, and managerial productivity is modest.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, Goethe University Frankfurt, WHU – Otto Beisheim School of Management and University of Cologne who share the same research agenda.

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