An Experimental Investigation of Budget Rejection Authority Placement in Three-Tier Hierarchies

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Abstract

In a participative budgeting setting, this paper examines the relative merits of different choices regarding to whom to assign budget rejection authority in a hierarchical firm. While the participative budgeting literature has traditionally examined dyadic firms (i.e. firms consisting of only an owner and a worker), many firms exist as taller hierarchies. In such firms, the question of where to locate an important budgetary control – rejection authority – to promote improved budgetary reporting becomes meaningful. It is hypothesized that delegating budget rejection authority to the manager leads to increased slack consumption by the agent in comparison to the situation in which the principal retains such authority. Research questions address whether the agents report more accurately when both the manager and the principal have rejection authority by comparison to the arrangement in which only one of these individuals hold such power. Results suggest that delegating rejection authority to the manager does not entail agency related costs. Further, agents capture the least slack capture when the control is duplicated but this benefit comes at a substantial decrease in the amount of surplus the firm can capture.

Author

• James Wilhelm, Chapman University