A Note on the Roles of Aggregation and Delay in Management Control

ABSTRACT: Accounting information is often produced in an aggregate format and is delayed in its arrival. This teaching note examines the effects of aggregation and de-layed arrival in the context of management control. One might expect that a reduction of information about managerial performance would reduce the efficiency of incentive schemes designed to increase goal congruence within the firm. Contrary to this intui-tion, aggregation, which reduces information, in some circumstances increases the efficiency of incentive schemes. This potential improvement in efficiency results be-cause under aggregation the superior can exploit the subordinate’s uncertainty about his future compensation. However, the resultant information loss from aggregation is generally costly, and these costs may outweigh the benefits of aggregation. We further illustrate that delayed arrival of information may allow an owner to enjoy the benefits of aggregation without incurring its costs. The approach taken in this note is similar to Antle and Demski (1988) and Arya et al. (1998), in that the discussion is centered on numerical examples and placed within the context of a simple model of management control that is accessible to upper-level undergraduate and master’s students. The advantage of this approach over having students go directly to the academic literature is that the simple linear structure of the illustrations facilitates construction and solution of numerical examples using spreadsheet analysis and also exposes the intuition more easily