The Robustness of Honesty Effects on Budget Proposals when the Superior has Rejection Authority

Abstract

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.

The Effect of Individual and Pooled Profit Sharing Plans on Honesty in Managerial Reporting

“…Because the budget task is relatively simple, upper‐level accounting students possess sufficient capabilities to perform it. This participant pool is consistent with those used in previous studies in participative budgeting (e.g., Fisher et al ; Rankin et al ; Hannan et al ; Douthit and Stevens ).…”

“…Dunk and Nouri (1998) identify slack as any intentional underestimation of production capabilities or overestimation of costs. This concept of intentional misstatement has led more recent studies to focus on opportunistic behaviors associated with slack-as opposed to other motivations for slack, such as guarding against uncertainty (e.g., Evans et al 2001;Hannan et al 2006;Rankin et al 2008;Hannan et al 2010;Church et al 2012Church et al , 2014Newman 2014;Douthit and Stevens 2015). 3 Brown et al (2009) maintain that agency theory should still serve as the foundation in the examination of participative budgeting because of the tractable predictions it generates.…”

In Search of a Theory of Budgeting: A Literature Review

“…A number of mechanisms such as cheap talk (Kachelmeier, Smith, and Yancey, 1994), truth-inducing pay schemes (Chow, Cooper, and Waller, 1988), and Groves mechanisms (Arnold, Ponick, and Schenk-Mathes, 2008) are studied. Researchers also examine the effectiveness of truth-inducing schemes (Rankin, Schwartz, and Young, 2008;Douthit and Stevens, 2015), by observing results of the experiments.…”

Budgetary slack under budget-based incentive schemes—the behavioral impact of social preferences, organizational justice, and moral disengagement

“…The corresponding studies are discussed in the following. The basis for the evaluation of social preferences is research by Evans et al (2013), as well as Douthit and Stevens (2015).…”

“…Abdullah (2013), on the other hand, finds no relationship between horizontal equity and the creation of budgetary slack. Douthit and Stevens (2015) focus on the pay distribution between the superior and the subordinate. In their experimental study honest reporting of the subordinate leads to an unfair distribution of surpluses.…”