Budgeting, Psychological Contracts, and Budgetary Slack

We study three types of budgeting (authoritative, consultative, and participative) that differ in the influence that managers have on their approved budgets and the opportunities they provide for managers to build budgetary slack into their budget requests. We provide evidence that when organizations implicitly communicate that budgeting will be participative, it establishes psychological contracts in managers. If managers subsequently experience budgeting that is inconsistent with their psychological contracts, then their psychological contracts are breached. This leads to feelings of violation and distrust, even when the terms of the managers’ economic contracts are fulfilled. We examine if managers whose psychological contracts are breached seek redress by building additional budgetary slack into their budget requests. Experimental results indicate that authoritative and consultative budgeting result in psychological contract breach to a greater extent than participative budgeting. To seek redress, managers build in more budgetary slack when budgeting is authoritative or consultative than when it is participative. Furthermore, the effects of the extent of psychological contract breach on built-in budgetary slack persist in the future when budgeting is participative.

This seminar is organised by the Erasmus Accounting Research Group.