The Role of Commitment Devices in Budgeting

Abstract

We administer an experiment to investigate a commitment device in the form of an unobservable commitment regarding a superior's acceptance rule for a subordinate's budget request. We find that unobservable commitment, when exogenously imposed, diminishes superiors' propensity for costly norm enforcement. The results for an endogenous treatment are similar except that those superiors who choose unobservable commitment only occasionally use the commitment device in a manner consistent with norm enforcement. Our interpretation of the results is that unobservable commitment decreases the emotional response to unfair behavior and that information asymmetry accentuates this effect.

Information Acquisition and Opportunistic Behavior in Managerial Reporting

“…Although Schwartz et al. () is similar to our study in that it investigates the avoidance of information, its focus is on information avoidance by superiors rather than subordinates and, as such, does not provide insight into how information avoidance by the manager making the report may affect honesty.…”

“…Schwartz et al. () investigate superiors' self‐serving manipulation of a production hurdle system (i.e., a system under which budgets above the hurdle will be automatically rejected) and find that superiors set high hurdles such that inflated budgets can be accepted (thereby increasing their wealth) without “interruption” from their visceral emotions. Although Schwartz et al.…”

“…Schwartz et al (2013) investigate superiors' self-serving manipulation of a production hurdle system (i.e., a system under which budgets above the hurdle will be automatically rejected) and find that superiors set high hurdles such that inflated budgets can be accepted (thereby increasing their wealth) without "interruption" from their visceral emotions. Although Schwartz et al (2013) is similar to our study in that it investigates the avoidance of information, its focus is on information avoidance by superiors rather than subordinates and, as such, does not provide insight into how information avoidance by the manager making the report may affect honesty. In many budgeting and reporting settings, wealth-maximizing reports require lying.…”