Flattening the Organization: The Effect of Organizational Reporting Structure on Budgeting Effectiveness
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Abstract
| This study investigates whether increasing a superior’s span of control improves the effectiveness of capital budgeting in eliciting truthful reports. We conduct an experiment based on the recent empirical evidence that individuals have utility for enforcing social norms. Specifically, we assume the superior is willing to incur a cost in order to punish a subordinate who she believes is incorporating excess slack in his budget, thereby violating a social norm. This assumption leads to the prediction that as the span of control increases, superiors will be more willing to reject project proposals with high budgeted costs. We further predict that subordinates under an expanded span of control will anticipate the superiors’ increased “toughness,” and will respond by reducing their budgetary slack. We conduct an experiment to test these predictions. The experimental results are consistent with our conjectures. That is, as the span of control is increased, superiors show a greater willingness to reject projects for which they believe slack is excessive, and subordinates respond by reducing slack. The net result of these two effects is that as the span of control is increased, superiors earn more profit per subordinate. Thus, our study suggests that increasing the span of control can improve the effectiveness of the budgeting process, which is an important component of most firms’ control environments. Although prior research has generally assumed that increasing the span of control weakens the control environment, our study demonstrates that increasing the span of control can actually strengthen an aspect of it. |
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| Paolo Perego |
