The effects of accountability and type of budget agreement on the economic consequences of budget negotiation: an experimental investigation

This thesis uses a laboratory experiment to further our understanding of the complex interactions involved in the budgetary process. As such it aims to enrich and enhance the budgetary control literature. In a setting where budgets are negotiated, several aspects of both budgetary slack and task performance were investigated. Firstly, information availability (private or public) and accountability pressure (present or absent) were manipulated to examine the effect of accountability pressure on budgetary slack. In addition, the mediating role of subordinates’ perceived levels of honesty on the relationship between accountability pressure and budgetary slack was investigated. Secondly, information availability (private or public) and type of budget agreement (negotiated or superior-imposed) were manipulated in an examination of task performance. The analysis was expanded to include the effects of two mediating variables, (level of frustration and budget commitment), on task performance. Analysis of variance (ANOVA) and path analysis techniques were used to test the various hypotheses developed in this thesis with the results generally supporting the hypotheses. Specifically, the results suggest that accountability pressure can be used as an effective monitoring control to mitigate subordinates’ propensity to create budgetary slack. It was found that, where performance information is not shared between subordinates and superiors (i.e., information is private) budgetary slack is (lowest) highest when accountability pressure is (present) absent. The results further reveal that accountability pressure is positively associated with subordinates’ levels of honesty, which in turn is negatively associated with budgetary slack. In addition the type of budget agreement was found to have an influence on subordinates’ task performance.