Abstract
Abstract Information/transaction costs make it necessary to decentralize some decision rights in organizations and in the economy. Decentralization in turn requires organizations to solve the control problem that results when self-interested persons do not behave as perfect agents. Capitalist economies solve these control problems through the institution of alienable decision rights. But because organizations suppress the alienability of decision rights, they must devise substitute mechanisms that perform those functions. Three functions are critical: (1) allocating decision rights among agents in the organization, (2) measuring and evaluating performance, and (3) rewarding and punishing individuals for their performance. Responsibility budgeting and accounting systems are the most widespread mechanisms for performing these functions in business today.
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