Deceptive Superiors and Budgetary Reporting: An Experimental Investigation

Abstract

This study examines behavior in a budgeting setting where a superior has private information regarding the accuracy of the firm’s cost system, which she may misrepresent in an effort to elicit more truthful budget proposals from subordinates. We explore two features of this budgeting setting. First, the signal type regarding the accuracy of the firm’s cost system is either public information or private information of the superior. We also compare the cases where either the subordinate or the superior has final budget authority. Results indicate that superiors strategically misrepresent their private information in an attempt to reduce the creation of slack. Further, having a private accuracy signal reduces slack when subordinates unilaterally set their budgets, but not when superiors have final budget authority.

Keywords: Participative Budgeting, Budgetary Slack, Cost System, Experiment

JEL Classification: C90; D82; M41; M55