Agency Theory and Participative Budgeting Experiments

Abstract

A series of participative budgeting experiments has examined the effect of incentive structures and/or information environments on employees' reporting and production decisions. We analyze the previous experiments in terms of the insights they offer regarding agency theory. We expand the previous analyses of the incentive contracting experiments in three ways. First, we classify the earliest set of participative budgeting experiments based on the type of incentive and information structures examined in each study. Second, from the 21 papers we review, we identify eight specific cases for which the experimental evidence contradicts an agency theory prediction (i.e., anomalies). Third, we develop a classification scheme that can be used to organize hypotheses in terms of whether they rely on an agency theory prediction, a competing behavioral prediction, or a combination of the two. We use this classification to illustrate why we believe that studies that test both an agency theory prediction and a competing behavioral prediction are more likely to advance the development of theory than those that do not.

The Robustness of Honesty Effects on Budget Proposals when the Superior has Rejection Authority

“…Results from Experiment 2 suggest that reciprocity does not diminish honesty effects and superiors can achieve higher profits by relying on such honesty. Thus, our results support prior experimental research documenting the importance of honesty in maintaining the efficiency of participative budgeting (Brown et al 2009). …”

“…In supplemental analysis of superior rejection behavior, we find that superiors were willing to engage in the costly behavior of rejecting the budget to enforce honesty and reciprocity norms in the subordinate's budget. Our study follows the suggestions in Brown et al (2009) regarding the conditions in which experiments have the greatest potential to extend traditional agency theory. We utilize a baseline prediction from the agency model of participative budgeting in Antle and Eppen (1985), and incorporate insights from Bicchieri's (2006) model of social norm activation to explain why our results are expected to deviate from that baseline prediction.…”

“…First, the model provides a strong agency prediction that can be used to test alternative theories of behavior (Brown et al 2009). Second, the subordinate knows the actual cost with certainty when he proposes his budget, which controls for risk preferences (RSY 2008).…”

“…P articipative budgeting represents one of the most widely researched topics of experimental research in managerial accounting (Brown, Evans, and Moser 2009). This body of research is important because participative budgeting is commonly used to aid in the efficient allocation of resources in decentralized firms (J.…”

Assessing the impact of budgetary participation on budgetary outcomes: the role of information technology for enhanced communication and activity-based costing

“…Budgetary slack often results from dysfunctional-even dishonestbehavior in which managers attempt to serve their own interests (Stevens 2000). In agency theory terms, such budgetary slack represents the magnitude of the miscommunication error between principal and subordinate managers with limited consideration of how budgets are subsequently used by managers for planning and control related purposes Brown et al 2009). Managerial performance refers to the outcome of an individual manager's effort (Winata and Mia 2005).…”