Budget Difficulty and Performance in Unstable Production Environments

47 Pages Posted: 1 Nov 2017 Last revised: 10 Nov 2017

See all articles by Jeremy Douthit

Jeremy Douthit

University of Arizona - Dhaliwal-Reidy School of Accountancy

Ashley Sauciuc

Indiana University

Date Written: October 30, 2017

Abstract

Budgets serve an important role in motivating employee performance. We examine how the difficulty of meeting a budget target (“budget difficulty”) and the stability of the budget environment affect performance. We use a controlled experiment where employee-participants perform a task under incentivized budgets. The budget is either stable, with a constant difficulty, or unstable, with difficulty occasionally increasing from the typical difficulty to a high difficulty level. We find that performance is higher in unstable than stable environments and is higher when the typical budget difficulty is moderate rather than low. Further, we find that learning in unstable environments is greater when the typical budget difficulty is moderate rather than low. This yields greater preparedness for – and greater performance in – unstable periods with heightened difficulty. We contribute to the debate regarding the usefulness of budgets by highlighting benefits of fixed budget targets under environmental uncertainty: increased performance and learning.

Suggested Citation

Douthit, Jeremy and Sauciuc, Ashley, Budget Difficulty and Performance in Unstable Production Environments (October 30, 2017). Available at SSRN: https://ssrn.com/abstract=3062807 or http://dx.doi.org/10.2139/ssrn.3062807

Jeremy Douthit (Contact Author)

University of Arizona - Dhaliwal-Reidy School of Accountancy ( email )

Tucson, AZ 85721
United States

Ashley Sauciuc

Indiana University ( email )

1309 E 10th Street, Hodge Hall 4100
Bloomington, IN 47405
United States

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