Decentral Information Acquisition and the Value of Cost Observability

This paper investigates a model where a manager gathers private information about the cost variables of his responsibility center. The owner then elicits the manager's information from a budgeting mechanism. If the manager has to acquire information before the budgeting stage, stronger production distortions relative to the standard adverse-selection situation arise. Moreover, the manager may engage in ine cient rent seeking and overinvests in the acquisition of information. Monitoring the manager's cost of gathering information limits the production distortion. However, this comes at very high rentseeking activity. Conversely, if the owner commits not to monitor rent seeking is mitigated but at the cost of stronger production distortions.