The Effect of Honesty and Superior Authority
b b b b b b b
on Budget Proposals
b b
bybSinderelllab
THEbACCOUNTINGbREVIEW
Vol.b83,bNo.b4
2008
pp.b1083–1099
AmericanbAccountingbAssociation
DOI:b10.2308/accr.2008.83.4.1083
ThebEffectbofbHonestybandbSuperiorbAuthority
onbBudgetbProposals
FrederickbW.bRankin
ColoradobStatebUniversity
StevenbT.bSchwartz
StatebUniversitybofbNewbYorkbatbBinghamton
RichardbA.bYoung
ThebOhiobStatebUniversity
ABSTRACT:bResearchbinbbudgetingbsuggestsbthatbsubordinatesbmaybexhibitbeconomicallybsigniï¬
•cantbdegreesbofbhonesty,binbspitebofbpecuniarybincentivesbtobdobotherwise.bThisbstudybcontinuesbt
hebexplorationbofbhonestybinbbudgetingbalongbtwobdimensions.bFirst,bunlikebpriorbexperiments,bweb
measurebthebincrementalbeffectbofbhonestybbybmanipulatingbwhetherbbudgetbrequestsbarebmadebin
bthebformbof babfactualbassertion.bSecond,bpriorbdesignsbmaybhavebemphasizedbthebethicalbdimensi
onbofbbudgetingbbybgrantingbthebsubordinatebwidebdiscretionboverbsettingbthebbudget,bwhereasbweb
manipulatebwhetherbthebsubordinateborbthebsuperiorbhasbﬕnalbauthorityboverbsettingbthebbudget.b
Webﬕndbthatblessbslackbisbcreatedbwhenbbudgetbcommunicationbrequiresbabfactualbassertionbinbt
hebsubordinatebauthoritybtreatment,bbutbnotbwhenbthebsuperiorbhasbﬕnalbauthority.bHence,bwebï¬
•ndbanbincrementalbeffectbofbhonestybonlybwhenbthebsubordinatebhasbﬕnalbauthority.bWebconjec
ture,bandbprovidebsomebevidence,bthatbthisbisbduebtobsubordinatesbframingbthebsuperiorbauthoritybsi
tuationbasbonebofbnegotiationbwherebeachbpartybactsbinbhisborbherbself-
interest,bratherbthanbasbanbethicalbdilemma.bThisbview,bthatbbudgetingbisbessentiallybdevoidbofbethic
albconsiderations,bisbconsistentbwithbsomebrecentbcharacterizationsbofbbudgetbpractices.
,Keywords:bparticipatorybbudgeting;bhonesty;bslack;bexperiment.bDatabAvailability:bContactbthebaut
hors.
ThisbpaperbhasbbeneﬕtedbfrombhelpfulbdiscussionsbwithbBryanbChurch,bCarlosbCorona,bHarrybE
vans,bJeffreybHales,bLynnbHannan,bScottbJackson,bMuralibJagannathan,bStevebKachelmeier,bDen
nisbLasser,bVolkerbLaux,bJoanbLuft,bDonbMoser,bPaulbNewman,bKristybTowry,bSeanbPeffer,bScottb
Vandervelde,bMichaelbWilliamson,bandbworkshopbparticipantsbatbColoradobStatebUniversity,bEmor
ybUniversity,bGeorgiabInstitutebofbTechnology,bUniversitybofbSouthbCarolina,bSaintbLouisbUniversity
,bStatebUniversitybofbNewbYorkbatbBinghamton,bThebUniversitybofbTexasbatbAustin,btheb2005bMana
gementbAccountingbConference,btheb2005bGlobalbManagementbAccountingbSymposium,bandbtheb
2005bAAAbAnnualbMeeting.bEditor’sbnote:bThisbpaperbwasbacceptedbbybMarlysbGaschobLipe.
Submitted:bFebruaryb2005
Accepted:bNovemberb2007
PublishedbOnline:bJulyb2008
1083
,1084
Rankin,bSchwartz,bandbYoung
I.bINTRODUCTION
nbdecentralizedbﬕrms,bthebbudgetingbprocessbisboftenbthebmannerbinbwhichbresourcesbareballoca
ted.bForbthisbprocessbtobbebaccomplishedbefﬕciently,binformationbmustbbebobtainedbfrombsubordi
natesbwhobarebinbclosebproximitybtobresourcebusage.bHowever,bifbsubordinates’bobjectivesbdivergeb
frombthosebofbthebﬕrm,btheybmaybwithholdborbmisrepresentbtheirbprivatebinformation.bInbfact,bage
ncybanalysesbofbthebbudgetingbprocessbassumebthatbinbthebabsencebofbtruth-
inducingbcontracts,bsubordinatesbwillbmisrepresentbtheirbprivatebinformationbtobservebtheirbownbint
erests,bregardlessbofbthebeffectbonbthebﬕrm.bSuchbopportunisticbbehaviorbbybsubordinatesbgreatl
ybreducesbthebvaluebofbthebbudgetingbprocessb͑BaimanbandbEvansb1983;bMelumadbandbReichelst
einb1987͒.bInbcontrast,bmanybbudgetingbstudiesbﬕndbthatbindividualsbdobnotbmisrepresentbtheirbp
rivatebinformationbtobthebextentbpredicted,binbspitebofbconsiderablebpecuniarybincentivesbtobdobsob͑
Chowbetbal.b1988;bWallerb1988;bEvansbetbal.b2001;bHannanbetbal.b2006Í’.bThesebstudiesbsuggestbth
atbsuperiorsbcanbtakebadvantagebofbsubordinates’btendencybtobavoidbmakingbuntruebfactualbasserti
onsbsobasbtobincreasebthebefﬕciencybofbthebbudgetingbprocess.bEvansbetbal.b͑2001͒bpointboutbth
atbifbsubordinatesbarebreluctantbtobmakebuntruebfactualbassertions,bthenbcontractsbthatbtakebthisbbe
haviorbintobaccountbwouldbresultbinbgreaterbproﬕtbthanbcontractsbbasedbonbthebstandardbagencyb
assumptions.
Priorbresearchbusesbthebconstructbofbhonestybtobexplainbthebtendencybofbindividualsbtobavoidbmakin
gbuntruebfactualbassertions,bdespitebexplicitborbimplicitbincentivesbtobthebcontraryb͑BaimanbandbLe
wisb1989;bEvansbetbal.b2001͒.1bWebmaintainbthisbdeﬕnitionbofbhonestybthroughoutbthebpaper.bTh
erebarebtwobreasonsbwhybwebundertakebabfurtherbinvestigationbintobthebeffectsbofbhonestybonbbudg
eting.bFirst,bpreviousbstudiesbsuchbasbEvansbetbal.b͑2001͒bandbHannanbetbal.b͑2006͒bhavebdifﬕc
ultybisolatingbthebeffectsbofbhonestybbecausebthebreportingbbehaviorbofbthebsubordinatebdirectlybaff
ectsbthebdistributionbofbwealthbbetweenbthebsuperiorbandbsubordinate.bTherefore,bdeviationsbfromb
self-
interestedbbehaviorbcanbbebattributedbeitherbtobhonestyborbtobotherbnonpecuniarybmotivationsbsuch
basbpreferencesbforbthebdistributionbof bwealth.bEvansbetbal.b͑2001͒brecognizesbthebimportancebof bth
ebsubordinate’sbconcernsbforbthebdistributionbofbwealthbbetweenbthebsuperiorbandbsubordinateband
bnotebthebneedbforbfurtherbresearchbtobreﬕnebourbunderstandingbof bthebfactorsbthatbinfluencebth
ebextentbofbhonesty.bWebaddressbthisbissuebbybmanipulatingbthebsubordinates’bmodebofbbudgetbco
mmunication,bincludingbonebtreatmentbwherebabfactualbassertionbisbrequiredbandbanotherbtreatmen
tbwherebnobfactualbassertionbisbrequired.bWhilebother-
regardingbpreferencesbmayboperatebinbbothbcases,bonlybinbthebformerbcasebshouldbhonestybbebrele
vantbbecausebonlybinbthatbcasebisbitbpossiblebtobmakebanbuntruebrepresentation.bBybexploringbbothb
formsbofbcommunication,bwebarebablebtobestimatebthebincrementalbeffectbofbhonesty.
, Second,binbnearlyballbstudiesbofbhonestybinbparticipativebbudgeting,bsubordinatesbhavebﬕnalbauth
orityboverbsettingbthebbudget.bBecausebthebsuperiorbhasbnobabilitybtobdenybfunding,bthebsubordinat
e’sbbudgetbproposalbandbthebformbofbthebcontractbinbplacebdeterminebthebdistributionbofbthebproﬕt
.2bItbisbpossiblebthatbthisbapproachbencouragesbsubjectsbtobframebthebbudgetingbprocessbasbanbeth
icalbdilemma,btriggeringbhonestband/orbotherbnon-
pecuniarybmotivations.bInbcontrast,binbmostborganizationsbbudgetsbarebsetbthroughbabprocessbthatbi
ncludesbnegotiationbbetweenbsubordinatesband
I
1
2
Ourbdeﬕnitionbisbabbroadbone,bincludingbhonestbbehaviorbduebtobsocialbconditioning,bmoralbreas
oning,bandbsocialbandbenvironmentalbcues,bamongbotherbthings.bWebdobnotbattemptbtobdifferentiate
bamongbthebvariousbmotivationsbforbhonesty,bbutbdoingbsobinbfuturebresearchbmaybbebhelpfulbinbfurt
heringbourbknowledgebofbbudgetingbbehavior.bInbvirtuallyballbpriorbresearchbinbparticipativebbudging
,bthebexperimentalistbactsbasbthebsuperiorb͑Youngb1985;bWallerb1988;bChowbetbal.b1988;bChowbetb
al.b1991;bYoungbetbal.b1993;bChowbetbal.b1994;b1995;bEvansbetbal.b2001;bStevensb2002;bFisherbetb
al.b2003͒.bHannanbetbal.b͑2006͒butilizedbsubject-
superiors,bbutbtheybplayedbnobactivebrole.bFisherbetbal.b͑2000͒,bFisher,bMaines,bPefferbandbSprinkl
eb͑2002͒bandbRankinbetbal.b͑2003͒butilizedbsubject-
superiorsbwhobdidbplaybabrolebinbthebsettingbofbbudgets;bhowever,bthesebstudiesbwerebdesignedbtob
examinebaspectsbofbbudgetingbotherbthanbhonesty.
ThebAccountingbReview
AmericanbAccountingbAssociation
Julyb2008
b b b b b b b
on Budget Proposals
b b
bybSinderelllab
THEbACCOUNTINGbREVIEW
Vol.b83,bNo.b4
2008
pp.b1083–1099
AmericanbAccountingbAssociation
DOI:b10.2308/accr.2008.83.4.1083
ThebEffectbofbHonestybandbSuperiorbAuthority
onbBudgetbProposals
FrederickbW.bRankin
ColoradobStatebUniversity
StevenbT.bSchwartz
StatebUniversitybofbNewbYorkbatbBinghamton
RichardbA.bYoung
ThebOhiobStatebUniversity
ABSTRACT:bResearchbinbbudgetingbsuggestsbthatbsubordinatesbmaybexhibitbeconomicallybsigniï¬
•cantbdegreesbofbhonesty,binbspitebofbpecuniarybincentivesbtobdobotherwise.bThisbstudybcontinuesbt
hebexplorationbofbhonestybinbbudgetingbalongbtwobdimensions.bFirst,bunlikebpriorbexperiments,bweb
measurebthebincrementalbeffectbofbhonestybbybmanipulatingbwhetherbbudgetbrequestsbarebmadebin
bthebformbof babfactualbassertion.bSecond,bpriorbdesignsbmaybhavebemphasizedbthebethicalbdimensi
onbofbbudgetingbbybgrantingbthebsubordinatebwidebdiscretionboverbsettingbthebbudget,bwhereasbweb
manipulatebwhetherbthebsubordinateborbthebsuperiorbhasbﬕnalbauthorityboverbsettingbthebbudget.b
Webﬕndbthatblessbslackbisbcreatedbwhenbbudgetbcommunicationbrequiresbabfactualbassertionbinbt
hebsubordinatebauthoritybtreatment,bbutbnotbwhenbthebsuperiorbhasbﬕnalbauthority.bHence,bwebï¬
•ndbanbincrementalbeffectbofbhonestybonlybwhenbthebsubordinatebhasbﬕnalbauthority.bWebconjec
ture,bandbprovidebsomebevidence,bthatbthisbisbduebtobsubordinatesbframingbthebsuperiorbauthoritybsi
tuationbasbonebofbnegotiationbwherebeachbpartybactsbinbhisborbherbself-
interest,bratherbthanbasbanbethicalbdilemma.bThisbview,bthatbbudgetingbisbessentiallybdevoidbofbethic
albconsiderations,bisbconsistentbwithbsomebrecentbcharacterizationsbofbbudgetbpractices.
,Keywords:bparticipatorybbudgeting;bhonesty;bslack;bexperiment.bDatabAvailability:bContactbthebaut
hors.
ThisbpaperbhasbbeneﬕtedbfrombhelpfulbdiscussionsbwithbBryanbChurch,bCarlosbCorona,bHarrybE
vans,bJeffreybHales,bLynnbHannan,bScottbJackson,bMuralibJagannathan,bStevebKachelmeier,bDen
nisbLasser,bVolkerbLaux,bJoanbLuft,bDonbMoser,bPaulbNewman,bKristybTowry,bSeanbPeffer,bScottb
Vandervelde,bMichaelbWilliamson,bandbworkshopbparticipantsbatbColoradobStatebUniversity,bEmor
ybUniversity,bGeorgiabInstitutebofbTechnology,bUniversitybofbSouthbCarolina,bSaintbLouisbUniversity
,bStatebUniversitybofbNewbYorkbatbBinghamton,bThebUniversitybofbTexasbatbAustin,btheb2005bMana
gementbAccountingbConference,btheb2005bGlobalbManagementbAccountingbSymposium,bandbtheb
2005bAAAbAnnualbMeeting.bEditor’sbnote:bThisbpaperbwasbacceptedbbybMarlysbGaschobLipe.
Submitted:bFebruaryb2005
Accepted:bNovemberb2007
PublishedbOnline:bJulyb2008
1083
,1084
Rankin,bSchwartz,bandbYoung
I.bINTRODUCTION
nbdecentralizedbﬕrms,bthebbudgetingbprocessbisboftenbthebmannerbinbwhichbresourcesbareballoca
ted.bForbthisbprocessbtobbebaccomplishedbefﬕciently,binformationbmustbbebobtainedbfrombsubordi
natesbwhobarebinbclosebproximitybtobresourcebusage.bHowever,bifbsubordinates’bobjectivesbdivergeb
frombthosebofbthebﬕrm,btheybmaybwithholdborbmisrepresentbtheirbprivatebinformation.bInbfact,bage
ncybanalysesbofbthebbudgetingbprocessbassumebthatbinbthebabsencebofbtruth-
inducingbcontracts,bsubordinatesbwillbmisrepresentbtheirbprivatebinformationbtobservebtheirbownbint
erests,bregardlessbofbthebeffectbonbthebﬕrm.bSuchbopportunisticbbehaviorbbybsubordinatesbgreatl
ybreducesbthebvaluebofbthebbudgetingbprocessb͑BaimanbandbEvansb1983;bMelumadbandbReichelst
einb1987͒.bInbcontrast,bmanybbudgetingbstudiesbﬕndbthatbindividualsbdobnotbmisrepresentbtheirbp
rivatebinformationbtobthebextentbpredicted,binbspitebofbconsiderablebpecuniarybincentivesbtobdobsob͑
Chowbetbal.b1988;bWallerb1988;bEvansbetbal.b2001;bHannanbetbal.b2006Í’.bThesebstudiesbsuggestbth
atbsuperiorsbcanbtakebadvantagebofbsubordinates’btendencybtobavoidbmakingbuntruebfactualbasserti
onsbsobasbtobincreasebthebefﬕciencybofbthebbudgetingbprocess.bEvansbetbal.b͑2001͒bpointboutbth
atbifbsubordinatesbarebreluctantbtobmakebuntruebfactualbassertions,bthenbcontractsbthatbtakebthisbbe
haviorbintobaccountbwouldbresultbinbgreaterbproﬕtbthanbcontractsbbasedbonbthebstandardbagencyb
assumptions.
Priorbresearchbusesbthebconstructbofbhonestybtobexplainbthebtendencybofbindividualsbtobavoidbmakin
gbuntruebfactualbassertions,bdespitebexplicitborbimplicitbincentivesbtobthebcontraryb͑BaimanbandbLe
wisb1989;bEvansbetbal.b2001͒.1bWebmaintainbthisbdeﬕnitionbofbhonestybthroughoutbthebpaper.bTh
erebarebtwobreasonsbwhybwebundertakebabfurtherbinvestigationbintobthebeffectsbofbhonestybonbbudg
eting.bFirst,bpreviousbstudiesbsuchbasbEvansbetbal.b͑2001͒bandbHannanbetbal.b͑2006͒bhavebdifﬕc
ultybisolatingbthebeffectsbofbhonestybbecausebthebreportingbbehaviorbofbthebsubordinatebdirectlybaff
ectsbthebdistributionbofbwealthbbetweenbthebsuperiorbandbsubordinate.bTherefore,bdeviationsbfromb
self-
interestedbbehaviorbcanbbebattributedbeitherbtobhonestyborbtobotherbnonpecuniarybmotivationsbsuch
basbpreferencesbforbthebdistributionbof bwealth.bEvansbetbal.b͑2001͒brecognizesbthebimportancebof bth
ebsubordinate’sbconcernsbforbthebdistributionbofbwealthbbetweenbthebsuperiorbandbsubordinateband
bnotebthebneedbforbfurtherbresearchbtobreﬕnebourbunderstandingbof bthebfactorsbthatbinfluencebth
ebextentbofbhonesty.bWebaddressbthisbissuebbybmanipulatingbthebsubordinates’bmodebofbbudgetbco
mmunication,bincludingbonebtreatmentbwherebabfactualbassertionbisbrequiredbandbanotherbtreatmen
tbwherebnobfactualbassertionbisbrequired.bWhilebother-
regardingbpreferencesbmayboperatebinbbothbcases,bonlybinbthebformerbcasebshouldbhonestybbebrele
vantbbecausebonlybinbthatbcasebisbitbpossiblebtobmakebanbuntruebrepresentation.bBybexploringbbothb
formsbofbcommunication,bwebarebablebtobestimatebthebincrementalbeffectbofbhonesty.
, Second,binbnearlyballbstudiesbofbhonestybinbparticipativebbudgeting,bsubordinatesbhavebﬕnalbauth
orityboverbsettingbthebbudget.bBecausebthebsuperiorbhasbnobabilitybtobdenybfunding,bthebsubordinat
e’sbbudgetbproposalbandbthebformbofbthebcontractbinbplacebdeterminebthebdistributionbofbthebproﬕt
.2bItbisbpossiblebthatbthisbapproachbencouragesbsubjectsbtobframebthebbudgetingbprocessbasbanbeth
icalbdilemma,btriggeringbhonestband/orbotherbnon-
pecuniarybmotivations.bInbcontrast,binbmostborganizationsbbudgetsbarebsetbthroughbabprocessbthatbi
ncludesbnegotiationbbetweenbsubordinatesband
I
1
2
Ourbdeﬕnitionbisbabbroadbone,bincludingbhonestbbehaviorbduebtobsocialbconditioning,bmoralbreas
oning,bandbsocialbandbenvironmentalbcues,bamongbotherbthings.bWebdobnotbattemptbtobdifferentiate
bamongbthebvariousbmotivationsbforbhonesty,bbutbdoingbsobinbfuturebresearchbmaybbebhelpfulbinbfurt
heringbourbknowledgebofbbudgetingbbehavior.bInbvirtuallyballbpriorbresearchbinbparticipativebbudging
,bthebexperimentalistbactsbasbthebsuperiorb͑Youngb1985;bWallerb1988;bChowbetbal.b1988;bChowbetb
al.b1991;bYoungbetbal.b1993;bChowbetbal.b1994;b1995;bEvansbetbal.b2001;bStevensb2002;bFisherbetb
al.b2003͒.bHannanbetbal.b͑2006͒butilizedbsubject-
superiors,bbutbtheybplayedbnobactivebrole.bFisherbetbal.b͑2000͒,bFisher,bMaines,bPefferbandbSprinkl
eb͑2002͒bandbRankinbetbal.b͑2003͒butilizedbsubject-
superiorsbwhobdidbplaybabrolebinbthebsettingbofbbudgets;bhowever,bthesebstudiesbwerebdesignedbtob
examinebaspectsbofbbudgetingbotherbthanbhonesty.
ThebAccountingbReview
AmericanbAccountingbAssociation
Julyb2008
