Participative Budgets As Coordination and Motivational Devices

In this paper, I examine how participative budgets are used simultaneously to coordinate a firm's activities, assign tasks, and motivate managers to carry out their assigned tasks efficiently. The coordinating role of budgets, though emphasized in popular managerial accounting textbooks, has been overlooked in research investigations.' The literature on coordination problems has focused on transfer-pricing mechanisms and/or Groves' mechanisms. Transfer-pricing mechanisms attempt to solve coordination problems by decomposing the overall task of the firm into subtasks, where each subtask is assigned to a separate divisional manager.2 This decomposition is achieved by a system of linear, budgetbalancing transfer prices, which allow each subtask to be expressed as the maximization of divisional profit. Thus, each manager can focus entirely on activities within his division without concern for how his decisions affect other divisions. On the other hand, Groves' mechanisms achieve coordination by evaluating each manager on the combined profits of the firm and centralizing all decisions with externalities.3