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

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