BEHAVIORAL RESEARCH IN ACCOUNTING

Vol. 22, No. 1

2010
pp. 6783

American Accounting Association

DOI: 10.2308/bria.2010.22.1.67

The Effects of Aggregation and Timing on

Budgeting: An Experiment
Anthony D. Nikias
Texas A&M UniversityKingsville
Steven T. Schwartz
Binghamton University, SUNY
Eric E. Spires
The Ohio State University
Jim R. Wollscheid
University of Arkansas at Fort Smith
Richard A. Young
The Ohio State University
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 projects 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
We thank John Dickhaut, Theresa Libby, Michael McKee, and workshop participants at the 2007 AAA Annual Meeting,
ESA 2006 North American meeting, Binghamton University, SUNY, and Texas A&M UniversityKingsville for helpful
comments and suggestions. Financial assistance from the Texas A&M UniversityKingsville, College of Business Administration Summer Accounting Research Program, is gratefully acknowledged.

Published Online: January 2010

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Nikias, Schwartz, Spires, Wollscheid, and Young

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.
Keywords: aggregation; budgeting; management control; timing.
Data Availability: The data obtained in this experiment are available from the first
author.

INTRODUCTION
nformation asymmetry is at the core of most management control problems. Research in
management accounting has addressed this issue using both analytical and empirical methods.
Principal-agent analyses have investigated how to efficiently acquire and exploit accounting
information to minimize control costs e.g., Antle and Eppen 1985. Empirical studies have investigated similar questions while considering the effect of both pecuniary and nonpecuniary
motivations on behavior e.g., Evans et al. 2001. This study is of the latter type. We report on an
experiment designed to investigate the behavioral effects of aggregation and timing on budgeting
in a setting where information asymmetry induces a control problem.
Accountants have long acknowledged that the degree of aggregation is an important aspect of
financial reporting both within the organization and to a firms absentee owners. Paton 1922
notes that the summary balance sheet is not in itself a satisfactory unit and he mentions several
more detailed reports that should accompany it. In a similar vein, the American Institute of
Certified Public Accountants AICPA 1975, in their Statement on Auditing Standards No. 5 on
fair presentation, notes information is classified and summarized in a reasonable manner, that
is neither too detailed nor too condensed.1 In general, choosing the optimal degree of aggregation
calls for a balance between the amount of information made available and the ease of use.
With respect to budgeting, firms may choose to prepare budgets that allocate resources for an
entire quarter, a month, or a week. Similarly, budgets may be prepared for an entire division, a
department, or an individual transaction. In addition, budgets may be prepared or updated on a
timely basis as soon as any new information becomes available; alternatively, budgets may be
delayed until a large amount of new information is obtained and then combined into one budget.
In this sense, delay may be thought of as an enabler of aggregation, whereas instantaneous
reporting is by nature always disaggregated. More detailed and timelier budgeting procedures have
the potential to provide better information for planning, but involve added expenses due to the
time and effort associated with more detailed and timely budgets.
Our focus, however, is not on the planning aspects of budgeting per se, but rather on the
management control aspects of budgeting, or more specifically the potential for slack creation. We
define slack as the difference between resources provided by superiors and those needed for
operations. Subordinates may create slack by, for example, understating profitability or productivity. Subordinates may consume slack in the form of perquisites, lower effort, or even embezzlement. Dunk and Nouri 1998 estimate that upward of 30 percent of operating expenses can be
attributed to slack; therefore, it is important that researchers address the effect of budget protocols,
including aggregation and timing, on the creation of budgetary slack.
Various principal-agent models have been developed to study slack creation. Antle and Eppen
1985, using a one-subordinate, one-project capital budgeting setting, demonstrate that the superior optimally commits to reject some profitable projects. That is, the superior trades off capital

This viewpoint is maintained in the 1992 Statement on Auditing Standards No. 69, which superseded Statement No. 5.

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rationing with slack reduction. Antle et al. 1999 use a similar platform to analyze a onesubordinate, two-project capital budgeting setting. They show that the superior benefits from
bundling the projects together, in that the subordinate submits individual budgets for each project
simultaneously, and the superior compares the two budgets before deciding what to do with either
project. The benefit derives from the superiors improved ability to trade off slack and capital
rationing.
Nikias et al. 2007 provide an extension. They demonstrate that aggregation of two potential
projects into a single budget request also has benefits relative to separate requests, even though the
superior cannot distinguish the attributes of the individual projects and so cannot treat them
separately. Finally, Arya and Glover 2001 perform an analysis of timely versus delayed budgeting. They compare making the funding decision on each project in sequence as they arrive to the
subordinate with waiting until all projects have arrived. They find that under some parameterizations, delay can reduce the cost of control. Altogether, these agency analyses suggest that aggregation or delay of budgets may be useful.2
However, typical principal-agent analyses, while providing a rich theoretical framework, often fail to capture the full range of behavioral motivations. Experiments have shown that nonpecuniary motivations such as inequity aversion Fehr and Schmidt 1999, honesty Luft 1997;
Gneezy 2005, and reciprocity Berg et al. 1995 can have significant effects on behavior. These
motivations are relevant to the study of aggregation in budgeting because aggregation, in addition
to inducing statistical properties that provide theoretical benefits, can impact nonpecuniary motivations through its effect on the perception of others behavior and intentions.3
An example of the real-world effect of aggregation in budgeting is found in the United States
defense budget of the 1980s. Initially, the build-up of the defense enjoyed wide popular support,
which included the procurement of multimillion-dollar tanks and aircraft. However, when investigators examined a more detailed budget and found that as part of a $32 million aircraft the
government had agreed to pay $659 for an ashtray, there was public outrage. The builder of the
aircraft offered to refund most of the money. Apparently, this was an effort by the builder to
maintain its image, as no law had been broken New York Times 1985.
As a more mundane example, consider an employee who must organize several sales meetings. He may be asked to prepare a budget regarding each meeting separately, in sequence. We
refer to this as sequential budgeting SEQ. Alternatively, he may be asked to aggregate the total
cost of the meetings into a single budget request, assuming that he has all the information at hand.
We refer to this as aggregate budgeting AGG. Finally, he may be asked to wait until he has
information on all meetings, and then make a separate budget request for each meeting. We refer
to this as delayed budgeting DEL. These are the three situations we investigate in the experiment, although in a somewhat more stylized, generic two-project setting.
We develop three hypotheses regarding the effects of aggregation and timing on budgeting.
First, we expect nonpecuniary motivations to lead to greater slack creation in AGG than in the
other two regimes. Aggregation allows subordinates to smooth high- and low-cost items in their
aggregate budgets, which can facilitate image management. Also, aggregation requires a single lie
or overstatement of cost, while disaggregated budgets can require two lies or overstatements to
attain the same amount of slack. This second aspect is relevant if individuals have distaste for
lying. Second, we expect slack creation to be greater in DEL than in SEQ. In DEL there is the
ability to better plan budget requests relative to SEQ. In addition, subordinates in DEL may view
2

The results of these analyses follow from the Central Limit Theorem, which states that distributions of means are tighter
than distributions of individual observations. A loose interpretation is the tighter distribution reduces the information
asymmetry between superior and subordinate, which is at the heart of most control problems.
See Brown et al. 2009 on this point.

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Nikias, Schwartz, Spires, Wollscheid, and Young

the situation as telling a single lie, because they make their decision on both projects simultaneously. Finally, within DEL and SEQ, it is possible that after an initial high-slack request subordinates will reduce slack creation in subsequent requests due to guilt, remorse, or a desire to
manage their image. Therefore, ceteris paribus, slack may decline from the first to the second
project. However, we expect a lesser decrease in slack from the first project to the second project
in DEL than in SEQ, due to subordinates better ability to manage their image and the general
reduced guilt in DEL.
Our results generally support our hypotheses. Slack is greater in AGG than in SEQ or DEL.
Slack is also greater in DEL than in SEQ. The difference in slack across projects is lower in DEL
than in SEQ, although this is attributable mainly to the first round of play. However, the data do
not strongly support any of our a priori rationales for the differences in slack. We conjecture, a
posteriori, that the results are primarily driven by greater concern for the superiors welfare in
SEQ than in AGG and DEL, possibly due to subordinates adopting a more cooperative frame in
that treatment.
The remainder of this paper is organized as follows. The second section discusses background
literature and develops hypotheses, the third section outlines the experimental design, the fourth
section describes our results, and the fifth section discusses implications and conclusions.
BACKGROUND AND HYPOTHESES
Setting
The experimental setting closely resembles the model of Antle et al. 1999, wherein a
subordinate has better information than a superior regarding the profitability of two capital investment projects. The superior cannot audit project costs. The superior provides funds for investment,
and the subordinate cannot make up any shortfalls from his personal wealth. The subordinates
welfare is assumed to be increased by the difference between the amount funded by the superior
and the cost, which we refer to as slack. Unlike Antle et al. 1999, but similar to treatments found
in Evans et al. 2001 and Rankin et al. 2008, we assume the superior must fund all project
proposals. The purpose of this last assumption is to make honesty and other nonpecuniary motivations salient to participants in the experiment.
Dunk and Nouri 1998, in their extensive review of the literature on budgetary slack, identify
information asymmetry and budget participation as two key drivers of slack creation. Further, they
cite studies claiming that slack detection by superiors can be difficult. Our setting captures these
important elements, in that 1 subordinates are better informed than superiors, 2 subordinates
have a taste for slack, 3 subordinates set the budget, and 4 ex post audits are not possible.
Further, our experiment is designed to insulate our results from confounding factors such as
repeated play or market competition.
Behavioral Implications of Aggregation and Timing
In our experiment, a selfish and rational subordinate would submit a budget request so as to
create as much slack as feasible. While self-interest will undoubtedly explain much of the results,
it is not a complete descriptor of behavior. In this section, we present relevant additional theories
to explain why behavior might not conform to standard economic predictions, and how such
deviations might vary across treatments. We then develop testable hypotheses.
Inequity Aversion
Researchers have theorized that individuals have preferences over how wealth is distributed
and have disutility for distributions they deem to be unfair Rabin 1993; Bolton 1991; Bolton and
Ockenfels 2000; Fehr and Schmidt 1999. The common feature of these theories is that individuals

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care not only about their own level of wealth, but also about their relative share. Individuals are
assumed to be willing to take costly actions to modify perceived-to-be-unfair distributions. Fairness norms usually center on equal splits, but can also be affected by environmental factors such
as earned property rights and contextual clues Hoffman et al. 1994; Hoffman et al. 1996. In
addition, it is generally assumed that individuals are more averse to distributions of wealth if they
are unfair to themselves than if they are unfair to others.
If subordinates claim the maximum available slack, it results in highly inequitable distributions in favor of themselves. Therefore, inequity aversion argues for a deviation from purely
selfish behavior. Deviations from purely selfish behavior have been observed in many budgeting
settings, such as that in Evans et al. 2001 and Stevens 2002, and so we would expect the same
in our experiment. However, the degree of aggregation does not affect the potential distributions
of earnings, and therefore inequity aversion per se is not expected to be associated with the degree
of aggregation or timing.
Aversion to Lying
Almost all cultures view honesty as an ethically desirable trait Murphy 1993. A considerable
cognitive psychology literature has found that lies generally are considered reprehensible Lindskold and Walters 1983. Perhaps as a result, people often choose to be truthful, as long as it is not
too costly. Luft 1997 theorizes that individuals trade off the pecuniary benefits of lying with the
psychic benefits of honesty, so that budgets may not be completely honest, but may also not be as
dishonest as pure selfishness would dictate. Evans et al. 2001, Hannan et al. 2006, and Rankin
et al. 2008 all observe partially honest budgeting behavior. More importantly, Rankin et al.
2008 demonstrate that honesty is relevant in budgeting, beyond what would be implied by
simple inequity aversion.
There is considerable evidence that individuals willingness to be honest is mediated by
fairness concerns. For example, when lying would result in a perceived unfair distribution of
wealth to others, participants show a greater tendency toward honesty Evans et al. 2001. In
contrast, when honesty would result in a perceived unfair distribution of wealth to themselves,
participants are generally more willing to lie Evans et al. 2001; Rankin et al. 2003. The concern
for fairness is a component of the more general concept of the consequences of lying Gneezy
2005. When deciding whether to lie, people are sensitive to how much the other party loses
Gneezy 2005. In our setting, self-interested budgeting would provide a very uneven distribution
of wealth in favor of the superior. Therefore, we expect fairness concerns to contribute to honesty.
When budgets are aggregated, subordinates have to lie only once in order to create the desired
amount of slack. In contrast, when budgets are disaggregated subordinates may have to lie several
times to create that same amount of slack. If subordinates consider lying to be undesirable, more
slack may be created with aggregation than with disaggregation.4 With respect to delayed disaggregation relative to sequential disaggregation, the simultaneous cost observation occurring in a
delayed setting may cause the subordinates to act as if they are essentially making a single
decision, albeit a decision that encompasses several requests. This may alleviate some of the
disutility associated with lying relative to a sequential setting.
Image Management
Most people are concerned about the image they portray to others, and hence tend to manage
their image Hannan et al. 2006; Leary and Kowalski 1990. Because lying is viewed as undesir4

If the psychic costs of lying are directly proportional to size of the lie, then the hypothesized increase in lying with
aggregation may not occur. If, however, the psychic costs of lying have a fixed component for each lie and a variable
component increasing in the size of the lie, our conjecture may hold, depending on the relative magnitudes of the
components.

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Nikias, Schwartz, Spires, Wollscheid, and Young

able but is also necessary to create slack, subordinates must balance image management with the
pecuniary incentives for dishonesty when choosing their budget. With respect to how image
management might interact with aggregation and delay, the most interesting case is when high
costs and low costs are jointly obtained. When budgets are aggregated, a subordinate may be able
to submit a moderate aggregate budget regarding the total cost to achieve a given level of slack
and still not appear too greedy. However, with disaggregation the same level of slack will not be
achievable without submitting a high budget when the underlying cost is high. This is due to the
constraint that budgets may not be less than cost on a project-by-project basis. Therefore, the
subordinate would have to build in most of the slack on lower cost projects, reducing the potential
for image management. Delayed budgets offer some relief relative to sequential budgets, in that
with delay subordinates learn all project costs before they make their requests. Therefore, they
have some ability to smooth the budgets, despite the fact that their budgets must still not be less
than the cost.
Also of interest is the way in which image management affects budget requests across projects
when budgets are disaggregated. Subordinates may try to repair a potentially damaged image from
initial high budget requests with a lower budget request on later projects. After securing slack with
an earlier budget, subordinates can submit a lower request for a later project, with the intent of
improving their image. Although this effect should be present whether disaggregation is sequential
or delayed, subordinates using sequential disaggregation are uncertain about later projects and
may protect themselves with higher requests for earlier projects.5 With delay, subordinates need
not guard against unforeseen cost outcomes.
Guilt Alleviation
Tangney et al. 1996 examine individuals feelings of guilt, which might result from interpersonal interactions involving lying as well as other transgressions such as cheating, stealing, and
failing to help others. Guilt resulting from the effects of ones actions and behavior is also likely
to cause feelings of remorse and empathy for others. Feelings of guilt and remorse can be caused
by moral reasoning resulting from disapproval and dishonor of ones actions by others Kohlberg
1969; Jones 1991; therefore, subordinates may make reparations for high requests by reducing
their requests on later projects. Alternatively, lying potentially breaks down the psychological
barriers to further lying, causing it to seem less morally wrong and reprehensible to the subordinate Bok 1978. If lying regarding the first-project cost breaks down psychological barriers to
doing so for later projects, subordinates might be less concerned with the superiors welfare when
submitting later requests.
Hypotheses
Slack across Projects in SEQ and DEL
We now present hypotheses that are specific to our experiment. Our first hypothesis, which
relates only to sequential SEQ and delayed DEL budgeting settings, concerns the difference in
slack that may be created between first- and second-project funding decisions. Our background
discussion suggests that three factors might cause slack creation to decline across projects and that
this effect would be greater in SEQ settings. First, subordinates may desire to manage their image
by reducing slack across projects to mend an unfavorable impression caused by a high budget
regarding the first project. This rationale is true for both SEQ and DEL settings. Second, if
5

In contrast, in a setting where requests are made in sequence, subordinates might anticipate that high costs for later
projects would constrain their image management efforts by forcing them to budget high amounts, in which case they
might create less slack for earlier projects. We would expect that the risk of not securing enough slack would outweigh
this effect.

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subordinates submit a high budget for the first project, guilt may ensue. Subordinates in SEQ may
attempt to alleviate this guilt by submitting a relatively lower budget for the second project.6
However, because subordinates in DEL see costs of both projects simultaneously, they might view
the two budgets as a single reporting decision and thus not be affected as much by guilt or
remorse. Third, in SEQ there is uncertainty about the second project at the time subordinates
submit their first-project budget. If subordinates in SEQ have a target in mind for how much slack
they wish to acquire, they may submit a higher budget request for the first project to guard against
a high second-project cost. This last effect would clearly not be present in DEL. One contrary
argument is lying about the first project may break down a psychological barrier to lying about the
second. Overall, our discussion supports the expectation that slack will decline across projects
within SEQ and DEL settings and that the decline will be greater in SEQ than in DEL settings.
However, due to possible confounding factors we test only the between-treatment effect.7
H1: The decrease in slack between the first and second projects will be greater in sequential
SEQ than in delayed DEL budgeting settings.
Slack across Treatments
Our second set of hypotheses regards the overall slack creation across the three treatments. In
general, our discussion leads to the expectation that slack will be greater in aggregate AGG
budgeting settings than in sequential SEQ and delayed DEL budgeting settings. Specifically,
AGG settings allow subordinates to more easily hide their slack creation for the purposes of image
management. Further, if subordinates are averse to lying, the fact that they need lie only once in
an AGG setting should increase slack creation.
We also expect greater slack in DEL than in SEQ settings, because in DEL subordinates can
plan their budgets more easily, smoothing the reports so as to acquire the desired amount of slack
while reducing the likelihood of having to submit very high budgets for any particular project.
Also, by observing costs and planning their budgets simultaneously, subordinates in DEL may feel
as if they are lying only once, thereby reducing the nonpecuniary costs of lying. Our second set of
hypotheses is as follows.
H2a: Slack creation will be greater in aggregate AGG than in sequential SEQ budgeting
settings.
H2b: Slack creation will be greater in aggregate AGG than in delayed DEL budgeting
settings.
H2c: Slack creation will be greater in delayed DEL than in sequential SEQ budgeting
settings.

EXPERIMENTAL DESIGN
A 1 3 AGG, SEQ, and DEL experimental design was used to examine the effects of
aggregation and timing of budgets on subordinates slack creation behavior. Participants were

In our experiment, superior/subordinate interaction is face-to-face and a given subordinate is never paired with the same
superior for more than one round. The only opportunity for a subordinate to alleviate guilt with a given superior is to
report a lower cost for the second project in the round.
In four of the five rounds the costs decreased across projects. If our measure of slack systematically varied with the cost
outcomes, cost outcomes could be a confounding factor for within-treatment tests. Hence, within-treatment tests are
omitted. However, because costs were identical across treatments, we test differences in the mean of the decline between
treatments.

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Nikias, Schwartz, Spires, Wollscheid, and Young

recruited from upper-level business courses of a medium-sized public university to participate in

one of the three treatments and were randomly assigned to the role of either superior or subordinate. After receiving the instructions available from the authors, participants completed a short
quiz to ensure they understood the task and compensation procedures. At the end of the experimental sessions, participants completed a post-experimental questionnaire see the Appendix.
A total of 112 participants 56 pairs were recruited for six sessions. Each session lasted
between one-and-one-half and two hours. The experimental design and number of participants in
each treatment are summarized in Table 1. Participants interacted in a face-to-face setting over five
rounds, where each round involved two projects.8 A turnpike design was used in which no superior
and subordinate were paired more than once, to mitigate contamination of the results from crossround effects. Participants were informed that they would not be paired with the same person more
than once.
To control for differences in risk attitudes, participants were compensated according to the
procedures in Berg et al. 1986. Risk preferences of the subordinate were not a factor in the AGG
and DEL treatments, because the subordinate knew both costs prior to submitting budget requests.
However, risk preferences were an important consideration in SEQ, because the subordinates did
not learn the cost of the second project until after submitting their first-project budget. Procedures
to induce risk neutrality were used in all three treatments. A linear transformation converted a
participants earnings into a probability of winning the higher of two cash prizes. Each participant
played one lottery, to reduce any procedural effects that might be present between the AGG, SEQ,
and DEL treatments.9
Participants were assigned the role of either Player 1 superior or Player 2 subordinate,
which they kept throughout the experiment. Player 1 was the residual claimant of an investment
project. The revenues of the project, which went to Player 1, were common knowledge and fixed
at 60. Player 2 privately observed the cost, which was an integer drawn from a uniform distribution on 11, 12,,50. Then Player 2 submitted a budget to Player 1. The instructions made it clear
to Player 2 that submitting a budget constituted making a factual assertion to Player 1 about the
cost. Therefore, any deviation from the actual cost should have been interpreted as a lie by the
participants.

TABLE 1
Experimental Design
Treatment

Cost
Observation

Budget Format

#
Participants

AGG
SEQ
DEL

simultaneous
sequential
simultaneous

aggregate
individual
individual

40
36
36

AGG Aggregate Treatment;

SEQ Sequential Treatment; and
DEL Delayed Treatment.

8
9

Not only is face-to-face interaction common between superior and subordinate within many organizations, but it also
greatly heightens the relevance of impression or image management Bohnet and Frey 1999a, 1999b.
Each participants earnings were converted to a probability of winning a lottery based on the maximum points each
participant could have earned. Participants received $20 if they won the lottery and $10 if they lost.

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Player 1 was required to fund the project at a level equal to Player 2s budget. Player 2
received as slack the difference between funds provided and the actual cost. The only constraint on
Player 2s budget was it could not be less than the actual cost or greater than 50. Player 1 received
60 minus the budget. Player 2 received an efficiency wage of five experimental points per round
in addition to the slack.10 Each round consisted of two projects, where the second projects cost
was drawn independently from the first.11 The procedures specific to each treatment are described
below.
Simultaneous Cost Observation and Single Aggregate Budget (AGG)
In the AGG treatment Player 2 observed the cost of each project simultaneously. Player 2 then
submitted an aggregate budget. The aggregate budget could not be below the total cost of both
projects nor above 100. Player 2 consumed as slack the difference between the aggregate budget
and the total actual cost for both projects combined.
Sequential Cost Observation and Two Individual Budgets (SEQ)
In the SEQ treatment Player 2 observed the cost for the first project and submitted the first
budget, before observing the cost for the second project and submitting the second budget. Each
budget was constrained in that it could neither be less than the actual cost nor greater than 50.
Simultaneous Cost Observation and Two Individual Budgets (DEL)
In the DEL treatment Player 2 observed the cost for both projects simultaneously. Player 2
then submitted separate budgets corresponding to each project, with the constraint that each
budget could neither be less than the actual cost nor greater than 50.
RESULTS
Slack Creation across Projects in SEQ and DEL (H1)
We begin by examining the slack creation for the first and second projects of SEQ and DEL.
Our metric of interest, similar to that used by Evans et al. 2001, is as follows.

Proportion of Slack Retained PSR =

budget actual cost

50 actual cost

The numerator of PSR is the amount of slack the subordinate secured via the budget. The denominator is the total slack available to the subordinate.12 Note the maximum allowable budget was 50.
Therefore, this ratio represents the proportion of available slack that was actually consumed by the

10

11

12

Similar to the situation in Rankin et al. 2008, were we not to provide an efficiency wage to the subordinates, there
would have been severe tension between the subordinates desire to be fair to themselves and their desire to be honest
and fair to the superiors. Therefore, to better observe the nonpecuniary motivations of interest we provided an efficiency
wage to the subordinates.
Similar to Hannan et al. 2006, the cost draws were made in advance so that all participants in all treatments received
the same costs. A few sequences of costs were discarded before arriving at the sequence used because they contained
several extreme outcomes. Participants were only told the cost for each project was randomly and independently
distributed. The cost draws used in rounds 1 through 5 were 31, 27, 26, 29, 43, 35, 24, 12 and 36, 13,
respectively.
PSR is undefined if the actual cost equals 50, but no such instances occurred in our experiment.

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Nikias, Schwartz, Spires, Wollscheid, and Young

subordinate. This measure is analogous to those used in dictator games, where researchers are
interested in the percent of available surplus consumed by the dictator.13
PSR means, medians, and standard deviations by treatment are displayed in Table 2. Mean
median PSR for the first and second project within SEQ were 0.582 0.565 and 0.486 0.444,
respectively. For DEL, mean median PSR for the first and second project were 0.706 0.691 and
0.696 0.738, respectively. To test H1, we subtracted participants mean first-project PSR from
their mean second-project PSR, producing one observation for each participant in SEQ and DEL.
We then performed a two-sample t-test, which showed a significant difference one-tailed p
0.034 in the direction predicted in H1.14
In the previous section we provided two potential explanations for why the decrease in slack
across projects would be greater in SEQ than in DEL: the lack of uncertainty in DEL and the
reduced guilt in DEL that comes with making a single decision. To provide insight into whether
either of the explanations may be descriptive, we provide in Table 3 PSR means for each project,
by round, for SEQ and DEL. For Rounds 1, 2, 4, and 5, the differences in slack across projects
between SEQ and DEL are in the hypothesized direction, but only significantly so in Round 1
one-tailed p 0.05. Thus, support for H1 is modest.
Further, although guilt may diminish over time as subordinates gain comfort with their reporting choices, there is no reason to expect the effects of uncertainty to dissipate. However, only

TABLE 2
Proportion of Slack Retained
Project 1
Mean
Median
Std. Dev.
Project 2
Mean
Median
Std. Dev.
All Projects
Mean
Median
Std. Dev.

SEQ

DEL

AGG

.582
.565
.219

.706
.691
.208

NA

.486
.444
.280

.696
.738
.220

NA

.534
.506
.239

.701
.707
.205

.798
.906
.288

SEQ Sequential Treatment;

DEL Delayed Treatment; and
AGG Aggregate Treatment.

13

14

Although metrics similar to PSR are commonly used, they are not without defect. For example, if subordinates were to
view slack in absolute rather than proportionate terms, PSR may not capture their motivations. To assess the sensitivity
of our results to the use of PSR, we also tested the hypotheses using Level of Slack Retained LSR, defined as reported
cost actual cost. Results for LSR are reported in footnotes.
Using LSR in SEQ, mean slack was 10.4 13.1 from the first second project, an increase of 2.7. In DEL, mean slack
was 12.4 19.2 from the first second project, an increase of 6.8. Consistent with H1, the mean increase in SEQ was
less than in DEL one-tailed p 0.01, using the two-sample t-test described in the text.

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TABLE 3
Proportion of Slack Retained by Round
Round
1

Round
2

Round
3

Round
4

Round
5

.751
.486
.265

.528
.569
.041

.579
.411
.168

.528
.518
.010

.524
.449
.075

.702
.652
.050

.671
.714
.043

.762
.582
.180

.665
.734
.069

.730
.796
.066

.805

.877

.750

.756

.801

SEQ
Project 1
Project 1
Project 2 Project 1
DEL
Project 1
Project 2
Project 2 Project 1
AGG
Both Projects
Cell entries are means.
SEQ Sequential Treatment;
DEL Delayed Treatment; and
AGG Aggregate Treatment.

in the first round is there any evidence of a difference in across-project budgets between SEQ and
DEL. Therefore, it appears unlikely that uncertainty was a major factor in our results.
Instead, the pattern of results in Table 3 suggests that SEQ participants experienced disutility
from lying about the first project in Round 1 that they wished to avoid in the future. After the first
project in Round 1, where they procured about 75 percent of the available slack, subordinates in
SEQ lowered the amount of available slack they procured to approximately 50 percent and continued doing so for the remainder of the experiment. In DEL, there is some suggestion of a
reduction in lying between the first and second projects of the first round, though of a much lesser
degree than in SEQ. We used a post-experiment questionnaire to provide further evidence on
participant motivations such as this see the Appendix. Specifically, subordinates in SEQ and
DEL were asked to rate the importance of their first-project budget in deciding their secondproject budget. The mean responses in SEQ and DEL were 3 and 2.8 out of 5, respectively, which
do not significantly differ from each other.
Slack Creation across Treatments (H2a, H2b, and H2c)
Hypothesis 2 examines differences in the overall PSR across the AGG, SEQ, and DEL treatments. The mean median PSR, where projects are pooled, as shown in Table 2, was 0.534
0.506, 0.701 0.707, and 0.798 0.906 in the SEQ, DEL, and AGG treatments, respectively.15
These differences, for both means and medians, are in the directions predicted in H2: AGG SEQ
H2a, AGG DEL H2b, and DEL SEQ H2c. The t-tests of mean differences yielded the
following all p-values are for one-tailed tests: t36 3.07, p 0.01 for AGG SEQ, t36
1.20, p 0.12 for AGG DEL, and t34 2.24, p 0.02 for DEL SEQ. A Wilcoxon-MannWhitney rank-sum test of differences in medians yielded the following all p-values are for
15

The large difference between mean and median PSR for AGG is due to one participant who had a PSR equal to
zerothis participant never lied.

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Nikias, Schwartz, Spires, Wollscheid, and Young

one-tailed tests: p 0.01 for AGG SEQ, p 0.03 for AGG DEL, and p 0.01 for DEL
SEQ. These results support H2a, H2b, and H2c, although the support for H2b AGG versus
DEL is only moderate.16
The lowest PSR highest degree of honesty occurred in SEQ and the highest PSR occurred in
AGG. The mean PSR in the SEQ treatment was close to 0.50, a commonly considered notion of
a fair distribution of wealth, whereas the PSR in AGG was approximately 0.80, a result similar to
that found in generic dictator games. One explanation we offered for the differences across treatments was subordinates could more easily appear to be honest in AGG than in DEL and SEQ. If
this were driving the results, we should find evidence that participants in AGG tried not to appear
too dishonest in their budgets. However, of the 100 budgets in the AGG treatment 20 subordinates
with five rounds of decisions each, 46 budgets were equal to the maximum of 100superiors in
these cases knew with virtual certainty that the subordinates were lying.17 In addition, 14 of the 20
subordinates submitted a budget of 100 in at least one round. For purposes of comparison, in 16
of the 90 rounds in DEL subordinates budgeted 50 for both projects, with five of 18 subordinates
budgeting 50 for each project for at least one round. In SEQ the incidences were even rarer: five
of 90 and two of 18, respectively.18 This evidence suggests that subordinates in AGG were not
using aggregate budgeting to appear honest, contrary to our conjectures.19
We also expected that knowing both costs in advance would allow subordinates in DEL to
manage their image by smoothing their budgets, relative to subordinates in SEQ. That is, subordinates in DEL could create more slack without seeming more selfish than subordinates in SEQ.
We measured smoothing as the absolute value of the difference between first- and second-project
budgets. Table 4 presents these data. Budgets in DEL were smoother on average than those in SEQ
for all rounds. The mean was significantly smaller i.e., smoother budgets for DEL, t34 2.27,
two-tailed p 0.03. Therefore, to some degree the subordinates desire to smooth the budget
might be responsible for the observed results.20 That is, image management may have been a
factor, but mainly in DEL.
Supplementary Analysis
The above analyses indicate that of our three rationales aversion to lying, image management, and guilt alleviation to explain differences across treatments, only image management has
support, but it is weak. Perhaps the lack of evidence of aversion to lying and guilt alleviation
derives from subordinates not viewing misreporting as morally reprehensible. Jensen 2003, 386
contends that lying about budgets and costs is expected of responsible managers and almost no
one in this system consciously believes that he or she is lying or behaving without integrity. If the
participants in our study believed that misreporting costs is expected behavior in a budgeting
context, they may not have had any reason to hide their misrepresentation or feel guilty. Our lack
of evidence of guilt also is consistent with the findings of Charness and Dufwenberg 2006. They
16
17
18
19

20

Using LSR, t-tests of means showed AGG SEQ p .01, AGG DEL p .135, and DEL SEQ p .013.
These are virtually the same as the tests of means using PSR.
The probability of both cost draws equaling 50 for a given round is 0.000625.
A chi-square test showed the difference in frequencies 14/20 versus 5/18 versus 2/18 to be significant 22 = 15.1, p
0.001. Follow-up tests indicated that AGG differed significantly from the other two treatments.
It is conceivable that the differential rate of extreme lying across treatments is due to our assignment of individuals to
treatments, rather than the treatments themselves. To assess the effects of this on our hypotheses tests, we reran the
t-tests and Wilcoxon tests after deleting subordinates with extreme observations i.e., mean PSR 0.95 or 0.05;
there were eight of 20, three of 18, and two of 18 participants so deleted in AGG, DEL, and SEQ, respectively. Tests of
the hypotheses are virtually unchanged. One-tailed p-values for the t- Wilcoxon test for H2a, H2b, and H2c were 0.002
0.002, 0.195 0.023, and 0.018 0.01, respectively.
The nature of the simultaneous cost observation in DEL may in and of itself induce smoothing, if it causes subordinates
to view budgets in a comparative manner Hsee and Leclerc 1998.

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TABLE 4
Smoothness of Budgets for SEQ and DEL
Round 1
Std. Dev.
Round 2
Std. Dev.
Round 3
Std. Dev.
Round 4
Std. Dev.
Round 5
Std. Dev.
Mean
Standard Deviation by participant

SEQ

DEL

7.67
6.15
4.28
6.17
6.67
4.54
9.06
6.47
13.94
10.10
8.32
4.64

6.33
5.71
3.67
4.33
4.83
4.49
4.72
4.90
5.89
6.49
5.09
3.86

Dependent variable is |first-project budget second-project budget|.

Cell values are means standard deviations of the dependent variable.
Lower values are associated with smoother budgets.
SEQ Sequential Treatment; and
DEL Delayed Treatment.

observe that one of the primary causes of guilt is failing to meet the expectations of others. In our
study it would be very difficult for subordinates to assess the expectations of superiors and
therefore it is unlikely guilt would ensue.
A post hoc explanation for our results is the treatments induced different frames for the
subordinates. Prior experiments in similar settings, such as dictator games, have shown that participant behavior is very sensitive to environmental variations. In our experiment subordinates
experienced greater face-to-face exposure to superiors in SEQ and DEL relative to AGG. In SEQ
and DEL subordinates submitted a budget regarding the first project, perhaps receiving nonverbal
responses, and then submitted their second-project budget. In AGG subordinates submitted only
one budget to superiors. This may have induced subordinates in SEQ and DEL to have greater
empathy for superiors, increasing other-regarding behavior. In other words, the SEQ and DEL
treatments may have evoked more of a cooperate frame than AGG. Pinkley 1990 and Pinkley
and Northcraft 1994 identify win-orientation versus cooperate-orientation as one determinant of behavior in bargaining situations. These orientations can be induced by the particular way
a scenario is presented, sometimes in very subtle ways. For example, Neale et al. 1987 report
that assignment of roles such as buyer and seller can induce different frames. It is possible
that the repeated face-to-face interaction with the same superior in SEQ and DEL induced a more
cooperative frame. Further, DEL may be considered a sort of intermediate case. Although subordinates faced the superior twice, they had the ability to make their decisions at a single instance,
before the effects of empathy would have taken hold.
The responses related to Question 2 of the post-experimental questionnaire support the notion
that subordinates may have framed the situations differently in the three treatments see the
Appendix. Subordinates were asked to rate the importance of superiors earnings to their budgeting decisions 5 extremely; 1 not at all. The mean responses were 3.2, 2.5, and 2.6 in SEQ,
AGG, and DEL, respectively. Using t-tests, the mean response in SEQ was significantly greater

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Nikias, Schwartz, Spires, Wollscheid, and Young

than that in AGG two-tailed p 0.05, and moderately significantly greater than in DEL twotailed p 0.10. The means for DEL and AGG did not differ significantly from each other, and
this may reflect the single decision aspect of DEL. In general, these results support the notion
that subordinates cared less about superiors welfare in AGG and DEL than in SEQ, which is
characteristic of a win-orientation Pinkley 1990.21
IMPLICATIONS AND CONCLUSIONS
We conducted an experiment on the effect of aggregation and timing on budgets in a setting
of information asymmetry. Information asymmetries are of first-order importance to the
information-gathering activities that necessarily attach to budgeting behavior Antle and Fellingham 1997. Therefore, our study has the potential to significantly add to our understanding of
budgeting.
In our experiment participants observed and reported the costs of two capital investment
projects. The participants observed and reported the costs sequentially, reported the costs separately but delayed reporting until both costs were observed, or observed the costs simultaneously
and reported them in aggregate. The first two treatments are a form of disaggregated reporting,
while the third is a form of aggregated reporting.
The main findings of our experiment are as follows.
1.
2.
3.

Slack creation was less for disaggregated budgeting than for aggregated budgeting.
Slack creation was less for sequential budgeting of costs than for delayed budgeting of
costs.
The difference in slack creation across projects was approximately the same for both
sequential and delayed budgeting systems, with the exception of the first round, in which
the decrease in slack was larger for sequential cost observation.

Formal principal-agent analyses using assumptions of selfish rationality have shown the superiors expected utility may be greater under an aggregate or a batch-process budgeting system
than under a sequential budgeting system. These analyses exploit the statistical properties of
aggregation and batch processing and the superiors ability to make commitments to reduce slack.
In contrast, our experiment found that a disaggregated, sequential system led to less slack than the
alternatives. By design, our results can be ascribed only to behavioral motivations beyond rational
selfishness. Our work is consistent with the call by Brown et al. 2009 to focus experimental
budgeting research on the tensions between the traditional economic assumptions and alternative
theories of behavior.
Although the experiment confirmed our expectations regarding the direction of the treatment
effects, the evidence does not support our a priori reasoning. Instead, it appears that subordinates
had a higher regard for the superiors welfare in SEQ than in AGG, possibly due to a more
cooperative frame, and this contributed to the lower slack. Our interpretation of the results suggests several practical implications of our study.
First, our experiment suggests that frequent interaction with subordinates may develop empathy with the superiors goals and needs. One could argue by extension that there may be costs
associated with budgeting through less personal media such as video conferencing and electronic
messaging, as opposed to face-to-face meetings. Second, it suggests that image management, in

21

We also examined whether a difference in reporting behavior existed among participants that scored higher on the
pre-experimental quiz using a regression with mean proportion of slack as the independent variable and quiz score as the
dependent variable. We found no significant relationship when either all questions or only those pertaining to the
compensation procedures were included.

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and of itself, may not be as important as previously thought, especially if the interaction is of a
one-shot nature. This differs from our earlier discussion of the defense budgets, where disaggregation into relatively simple components caused many to be mystified regarding the high price of
ashtrays and hammers, which modified the behavior of some defense contractors. However, this is
not truly a one-shot setting, as contractors and legislators face their constituencies often. We might
surmise that in the repeated settings that characterize most intra-firm budgeting interactions, both
image management and empathy are relevant. Finally, the results of our experiment suggest that
requesting frequent updates may have control benefits by denying subordinates the opportunity to
hide slack consumption.
Our experiment has several limitations. First, we considered only two projects, while in many
circumstances several projects might be available for aggregation. Second, as mentioned above,
some real-world situations may not be accurately portrayed as one-shot settings. Finally, our
post-experimental questionnaire was geared toward our a priori rationales for expected behavior.
Simple extensions of our experiment would investigate increasing the number of available projects
for aggregation, having participants interact repeatedly, and designing post-experimental questionnaires to provide more evidence on our a posteriori explanations such as increased empathy.
One may be tempted to interpret our results as emerging from a zero-sum game where only
the relative wealth of superior and subordinate is in question. However, viewed in a larger context,
the creation of slack is often wasteful and productively inefficient, in which case slack reduction
should be viewed as providing a social benefit. A recent newspaper article on one of the more
notorious perquisites, the corporate jet, quoted a consultant who had studied the purchase of
corporate jets as saying, The corporate jet is a money-loser Adams 2008. A more formal study
by Yermack 2006 found that not only is corporate jet use wasteful, but that it may be indicative
of a pattern of heavy perquisite consumption that reduces firm value. The implication of these
studies is that perquisite consumption is inefficient and its restriction could increase overall societal well-being, not just the superiors wealth.

APPENDIX
SUBORDINATE QUESTIONNAIRE FOR SEQUENTIAL
AND DELAYED TREATMENTS
Please circle one
1.

How important was the number of points you would receive to your decision of choosing
a cost report?
1
Not

Not Somewhat Very Extremely

at all very
2.

How important was the number of points Player 1 would receive to your decision of
choosing a cost report?
1
Not

Not Somewhat Very Extremely

at all very
3.

How important was the actual cost of the project to your decision of choosing a cost
report?

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Nikias, Schwartz, Spires, Wollscheid, and Young

1
Not

Not Somewhat Very Extremely

at all very
4.

How important was the cost you reported in the first period to your decision of choosing
a cost report in the second period?
1
Not

Not Somewhat Very Extremely

at all very

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