The Effect of Endogenous Discretionary Control Choice on Budgetary Slack: An Experimental Examination

Abstract

This study examines the effect of endogenous control choice on budgetary slack. The superior chooses between two alternatives: no control, wherein the superior commits to accept any budget, and a discretionary rejection authority control, wherein the superior decides ex post whether to accept or reject budgets. For both alternatives, we find that slack is lower when the superior chooses an alternative than when it is assigned exogenously. Our theory and results suggest that a superior’s choice of whether to introduce controls signals a superior’s expectations and intentions. The superior’s choice of no control signals trust and an intention to foster a norm of trustworthiness. The superior’s choice of rejection authority signals an above-average willingness to use rejections to enforce norms. Our results suggest that the value of participative budgeting may be increased if superiors can communicate to subordinates the expectations and intentions behind the design of the control system.