The Effects of Aggregation and Timing on Budgeting: An Experiment

ABSTRACT: We conduct an experiment to study the behavioral effect of aggregation and timing on budgetary reports. Subordinates submit budgets to superiors regarding two projects in a face-to-face setting. There are three treatments: (1) AGG, wherein subordinates privately observe each project’s cost and submit one budget regarding the aggregate cost of the two projects, (2) SEQ, wherein subordinates observe and submit individual budgets sequentially, so are uncertain about the second-project cost when they submit their first-project budget, and (3) DEL, wherein budgets are delayed, so that subordinates observe both costs before providing individual budgets. In all treatments superiors must approve the budget and subordinates can create more slack by submitting a larger budget. Based on image management, guilt alleviation, and preferences for honesty, we hypothesize that subordinates will (1) create more slack in AGG than in the other two treatments, (2) create more slack in DEL than in SEQ, and (3) decrease their slack creation from the first project to the second project more in SEQ than in DEL. Our results generally support all three hypotheses. However, analysis of the results does not support our a priori beliefs regarding the nonpecuniary motivations of subordinates. We argue, a posteriori, that a likely explanation for our findings is that increased face-to-face interactions in SEQ and DEL cause subordinates to care more about the welfare of the superior than in AGG. In general, the results indicate that frequent budget interactions may provide control benefits to superiors.