Ending Wasteful Year-End Spending: On Optimal Budget Rules in Organizations

47 Pages Posted: 27 Dec 2021 Last revised: 30 Jun 2022

See all articles by Christoph Siemroth

Christoph Siemroth

University of Essex - Department of Economics

Date Written: December 22, 2021


What can organizations do to minimize wasteful year-end spending before the annual budget expires? I introduce a two-period model to derive the optimal budget roll-over and audit rules. A principal tasks an agent with using their budget to fulfill the organization's spending needs, which are private information of the agent. The agent can misuse funds for private benefit at the principal's expense. The optimal rules are to allow the agent to roll-over a share of the unused funds, but not necessarily the full share, in most cases to audit only sufficiently large spending, and to exert maximum punishment if fund misuse is detected. The shape of the optimal audit rule can change once fund roll-over is allowed, so the model has important implications for auditors. An extension with endogenous budget levels shows that strategically underfunding the agent can be optimal.

Keywords: Auditing, Budget Carry-Forward, Budget Roll-Over, Fund Misuse, Moral Hazard, Year-End Spending

JEL Classification: D82, G31, H50, H83

Suggested Citation

Siemroth, Christoph, Ending Wasteful Year-End Spending: On Optimal Budget Rules in Organizations (December 22, 2021). Available at SSRN: https://ssrn.com/abstract=3991922 or http://dx.doi.org/10.2139/ssrn.3991922

Christoph Siemroth (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

HOME PAGE: http://sites.google.com/site/csiemroth/

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