Faculty Scholarship 1994 - Present

Participative Budgeting under Uncertainty: Multi-period Experimental Evidence

A widely acknowledged problem in participative budgeting is motivating subordinates to both truthfully communicate expected performance and maximize actual performance. This paper presents laboratory evidence concerning the effects of incentive scheme and risk preference on the outcomes of participative budgeting under uncertainty. The research design was 2x2, with two truth-inducing incentive schemes, one with a ratchet versus one with no ratchet, and two induced risk performances, risk-neutral versus risk-averse. Subjects set budgetary targets and performed a production oriented task for multiple periods. The outcomes measured were slack (a measure of truthful communication) and actual performance. The results for slack indicate that while a ratchet and risk aversion both led to increased slack, the ratchet incentive scheme led risk-neutral subjects to create as much slack as risk-averse subjects. The results for performance indicate that risk preference had no effect on performance but that a ratchet incentive scheme led subjects to perform lower than a no-ratchet scheme. The results indicate that when uncertainty exists, the use of a ratchet by the superior leads both risk-neutral and risk-averse subordinates to create slack (communicate less truthfully) and to underperform.