The Effects of Forecast Precision and Time Pressure on Motives to Create Budget Slack
38 Pages Posted: 8 Jul 2021
Date Written: June 15, 2021
Budgets are used in organizations for planning and resource allocation, and supervisors typically seek employees’ specific knowledge to develop budget targets. In practice, however, employees rarely know future resource needs with certainty at the time budgets are prepared. Moreover, budgets are often also used for motivation and evaluation, with employees’ implicit and/or explicit rewards and punishments tied to achievement of budget targets. We extend prior research on participative budgeting by examining whether the precision of employees’ forecasts of future resource needs impacts the extent to which they create budget slack (defined as seeking more resources than needed). We also examine whether a common contextual feature of work environments, as well as a mechanism supervisors could implement—increasing the time pressure on employees submitting budget information—reduces slack. Results of two laboratory experiments indicate that relative to precise forecasts, employees with imprecise forecasts increase budget slack, but only when there is an explicit monetary incentive to create slack. Imposing time pressure on budget submissions reduces that slack. Our design allows us to understand the effects of employees’ motives of honesty, personal wealth, and mitigating the uncertainty created by imprecise forecasts on slack creation. Overall, our results illustrate how two factors common in increasingly volatile and uncertain work environments—forecast precision and the need to produce budgets quickly—impact the value to firms of using budgets for planning and resource allocation decisions.
Keywords: Budget slack; forecast precision; time pressure; honesty
JEL Classification: M40, M41, M49
Suggested Citation: Suggested Citation