An economic modeling approach to contingency theory and management control

A prominent theme in recent accounting papers on management control has been the contingency theory approach to management control system design. A recent review of this contingency theory literature noted the need for a more explicit theoretical structure as well as a more all-inclusive model of the organization's control system. This paper argues that while a more explicit theory is needed, the development of relatively simple models is an important step in the construction of an all-inclusive model of management control. Two such simple models of a firm's control system design problem are presented and compared. The two models demonstrate that relatively simple models can capture multiple features of a control system and illustrate how the effect of contingency variables depends critically on the specific context in which the firm operates. Because the logic underlying these models is made explicit, the reader can better assess their reasonableness. Simple models can provide useful building blocks for more complex management control models and can be used to evaluate the analytical validity hypotheses that might be induced from observations in complex settings.