Using Negotiated Budgets for Planning and Performance Evaluation: An Experimental Study

Abstract

The notion that different budgeting functions are in conflict with each other is well established. While prior studies have focused on the economic interactions between conflicting budgeting functions, we examine how behavioral interactions affect budget negotiations. In particular, we experimentally investigate the effects of an additional planning task, both in a setting in which performance evaluation and planning can be solved with separate budgets and in a setting in which the superior is restricted to using a single budget. Our results support the conjecture that the superior’s additional planning task increases the subordinate’s interpersonal accountability to the superior. Specifically, subordinates’ bids during the negotiation and their performance following negotiation impasses increase, and these effects tend to be even larger when the superior is restricted to a single budget. Thus, the behavioral benefits of restricting the superior to a single budget more than offset the loss in flexibility. Our results add to the understanding of the interactions between multiple budgeting functions and help to explain why firms often use a single budget for multiple purposes.

Keywords: Budget negotiations, performance evaluation, planning, performance

JEL Classification: J33, M41, M52