Knowledge Transfer Costs and Political Visibility as Determinants of Financial Reporting in the Public Sector

Abstract

Jensel and Meckling (1992, 1995)suggest that decentralisation of a firm is determined by knowledge transter costs and control costs. Knowledge transfer costs are higher when decisions must be made on the basis of idiosyncratic knowledge scientific knowledge or assembled knowledge. Control costs are higher when there is a greater need for top management to coordinate the decisions of managers lower in the organisation. Decentralisation is more likely to take place when knowledge transter costs are high and control costs are low. Christie et al. (1993) find evidence(in the private sector) consistent with these predictions. This thesis suggests that knowledget transfer costs and control costs have a similar effect on public sector decision rights. This is evident through greater accountability. Knowledge transfer costs in the public sector are similar to those in the private sector. Control costs also have an effect in the public sector, and are higher when there is greater political visibility. There is a greater need for top decision-makers to coordinate decisions about issues that have high political visibility, and therefore less decentralisation in these circumstances.I hypothesise that the presence of high knowledge transfer costs and low political visibility in the New Zealand public sector leads to decentralisation and is associated with the use of audited financial statements. The evidence is consistent with my predictions and is robust to alternative ways of measuring explanatory variables.