Rankin, Schwartz, and Young (2008) find experimental evidence that manipulating whether the budget request of the subordinate requires a factual assertion has no effect on budgetary slack when the superior can reject the budget. This calls into question the role of honesty in participative budgeting settings. Using Rankin et al. 's (2008) manipulation to capture honesty effects, we examine the robustness of honesty effects on budget proposals when the superior has rejection authority in two experiments. In Experiment 1, we document that honesty has a strong effect on budgetary slack when the salience of distributional fairness is reduced by withholding the relative pay of the superior from the subordinate. In Experiment 2, we document that honesty continues to have a strong effect on budgetary slack when the salience of reciprocity is increased by giving the superior the ability to set the subordinate's salary. Thus, our evidence suggests that honesty effects on budget proposals are generally robust to giving the superior rejection authority. Our study helps explain prior experimental results and clarifies the role of honesty in participative budgeting settings.

Budgets are instrumental in management control systems but are prone to gaming behavior that creates slack and limits the effectiveness of budgets. Research suggests, however, that subordinates have preferences for adhering to a social norm of honesty that limits slack in their budgetary reporting. As such, an increased understanding of subordinates' preferences for honesty can improve participative budgeting systems. We develop and test theory that increases our understanding of the drivers of preferences for honesty. We test the theory that preferences for honesty originate from an individual's desire to avoid negative affect from violating social norms. Further, individuals systematically differ in the intensity with which they experience their negative affective reactions. Those with higher levels of this intensity (negative affect intensity, NAI), experience more negative affect and disutility from violating a norm of honesty. Thus, NAI is predictive of subordinates' preference for honesty. Experimental results support our theory. Budgetary slack is constrained by preferences for honesty and NAI increases preferences for honesty. As such, preferences for honesty are a stronger informal control for subordinates with higher NAI. We discuss the implications of our theory for contract design and job assignment.

Given traditional agency theory assumptions and unobservable effort in a single-period setting, a moral hazard arises in which the agent is expected to shirk and provide the minimal possible effort after contracting with the principal. Traditional solutions to this agency problem include paying the agent a financial incentive tied to some noisy measure of performance or allowing the agent to develop a reputation over multiple periods. As the noisiness of the performance measure increases, however, these traditional solutions become increasingly costly and ineffective. In many single-and multiperiod agency settings in the firm, however, the agent can communicate a promised level of effort to the principal prior to contracting. We document that this pre-contract communication, which is non-enforceable and therefore considered ''cheap talk'' by traditional economic theory, can be highly effective in mitigating the moral hazard problem in agency theory. In a repeating single-period experimental setting where production is observable but is a very noisy indicator of effort, communication of a promised level of effort results in higher pay for the agent, higher effort, and higher expected profit for the principal than the control group. When the principal and agent interact over multiple periods, reputation building is ineffective, but cheap talk continues to yield superior outcomes. These results are consistent with recent economic theory incorporating social norms such as the norm of promise-keeping.

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We examine the effect of a charitable contribution matching (CCM) program on employee effort. In CCM programs, employers commit to match employees' donations to charity. We expect CCM to activate a norm of other-regarding behavior, inducing employees to increase effort to benefit their employer. Experimental results robustly support our expectation. We find that CCM increases effort under both fixed-wage and performance-based incentive contracts. Further, our results suggest CCM is more effective at eliciting effort than alternative uses of firm capital. Specifically, CCM is more effective at eliciting effort than the firm allocating an equivalent amount of capital to either direct firm charitable giving or increased performance-based pay. Our study suggests that CCM has efficient and robust effort-elicitation benefits that increase its value as a compensation tool incremental to any initial employee selection benefits from CCM and any effort benefits from firms' direct charitable giving.

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