The Effect of Honesty Preferences and Superior Authority on Budget Proposals
Posted: 29 Oct 2004
Date Written: September 2004
In participative budgeting settings, less informed superiors elicit information from privately informed subordinates. In these situations, subordinates' honesty preferences should substantially enhance the efficiency of the budgeting process. In fact, recent research on budgeting suggests that subordinates have economically significant preferences for honesty. Despite these findings, we argue that, for two reasons, it is difficult to determine the effect that honesty preferences have on subordinates' budget requests. First, existing research is unable to disentangle preferences for honesty from other non-pecuniary motives, such as preferences for fairness. Second, and possibly more important, most budgeting research on the role of honesty highlights the ethical dimension of budgeting. Ethical considerations are emphasized in these studies by allowing subordinates to unilaterally set budgets, with superiors playing no role other than to experience the financial consequences of the final budget. In practice, superiors typically have final authority over budget approval, which can introduce a strategic component to the budgeting process. We design an experiment that allows us to disentangle honesty preferences from other non-pecuniary preferences. Our design also allows us to explore how a superior with authority over budget approval affects subordinates' behavior. We find no incremental effect of honesty preferences when the superior has final authority over budget approval. We conjecture (and provide some evidence) that this is due to subordinates framing the situation as one of strategic negotiation rather than as an ethical dilemma. This view, that budgeting is essentially devoid of ethical considerations, is consistent with some recent characterizations of budget practices.
Keywords: Budgeting, honesty experiment,
JEL Classification: M40, M46, J33, G31
Suggested Citation: Suggested Citation