Public and Private Forms of Opportunism within the Organization: A Joint Examination of Budget and Effort Behavior

ABSTRACT: We assert that some forms of opportunistic behavior within the organization are relatively transparent and, therefore, public in nature. Further, while organizations can tightly control such public opportunism, it may not be optimal for them to do so in the presence of private opportunism. To study how public and private forms of opportunism differ and interact, we jointly examine budget and effort behavior in a participative budgeting experiment. We group participants into producer/manager pairs and set the parameters such that the producer extracts the largest share of surplus from the manager by publicly setting the budget at zero and privately providing low effort. When the producer unilaterally sets the budget, the public opportunism of budgetary slack is higher and more affected by learning than the private opportunism of low effort. Giving the manager the power to reject the budget not only reduces budgetary slack by about 50 percent, but also generates reciprocity expectations and behavior. In particular, managers who allow more budgetary slack expect and receive higher effort from their producers on average. This reciprocity increases organizational performance by increasing the expected pay of the manager without decreasing the expected pay of the producer.