The Effect of Honesty Preferences and Superior Authority on Budget Proposals

Posted: 29 Oct 2004

See all articles by Anthony D. Nikias

Anthony D. Nikias

Keimyung University

Frederick W. Rankin

Colorado State University, Fort Collins - College of Business

Steven T. Schwartz

SUNY at Binghamton - School of Management

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

Abstract

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

Nikias, Anthony D. and Rankin, Frederick W. and Schwartz, Steven T. and Young, Richard A., The Effect of Honesty Preferences and Superior Authority on Budget Proposals (September 2004). Available at SSRN: https://ssrn.com/abstract=611206

Anthony D. Nikias

Keimyung University ( email )

Daegu
Korea

Frederick W. Rankin (Contact Author)

Colorado State University, Fort Collins - College of Business ( email )

Fort Collins, CO 80523
United States

Steven T. Schwartz

SUNY at Binghamton - School of Management ( email )

Binghamton, NY 13902-6015
United States
607-777-2102 (Phone)

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-0889 (Phone)
614-292-2118 (Fax)

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