Budget negotiations in multi-period settings

Abstract Budgets are typically set through a negotiation process that is repeated in successive periods, often between the same superior and subordinate. Despite this, little is known about budget negotiations in multi-period settings. Temporal interdependence is a fundamental aspect of budget negotiations in multi-period settings, and it refers to the fact that in multi-period budget settings, superiors’ (subordinates’) decisions and actions in one period can be influenced by subordinates’ (superiors’) decisions and actions in earlier periods and, in turn, can influence subordinates’ (superiors’) decisions and actions in later periods. We report the results of an experiment that addresses two issues related to temporal interdependence. The first issue we examine is the effect of an expectation of future budget negotiations with the same individual on current period negotiation strategies and outcomes. Consistent with our expectations, our results indicate that superiors and subordinates who expect future budget negotiations act more cooperatively. For example, when superiors and subordinates expect future budget negotiations, they are more likely to reach agreement on a budget and subordinate performance is higher. The second issue focuses on a multi-period setting with repeated budget negotiations between the same individuals. We examine the pattern of negotiation outcomes across periods to assess the effect of prior budget outcomes on current period negotiation strategies and outcomes. Our results indicate that in this setting, superiors and subordinates react to negotiation strategies and outcomes from prior periods in predictable ways. For example, once a particular superior and subordinate reached agreement, they were more likely to continue to reach agreement in future periods. In addition, superiors’ initial negotiation positions across periods and the budget levels across periods were consistent with superiors using subordinate performance in the prior period to update their beliefs about subordinate performance capability. One implication of our results is that some issues identified in prior, single-period budgeting research do not generalize to the multi-period setting where there is temporal interdependence.

[1]  Joan L. Luft,et al.  Bonus and penalty incentives contract choice by employees , 1994 .

[2]  Jesse F. Dillard,et al.  Compensation Schemes, Skill Level, and Task Performance: An Experimental Examination* , 1990 .

[3]  R. Anthony,et al.  Management Control Systems , 2020, Management Control Systems and Tools for Internationalization Success.

[4]  W. Waller,et al.  Slack in participative budgeting: The joint effect of a truth-inducing pay scheme and risk preferences , 1988 .

[5]  D. G. Pruitt,et al.  Resistance to yielding and the expectation of cooperative future interaction in negotiation. , 1984 .

[6]  A. Agresti,et al.  Statistical Methods for the Social Sciences , 1979 .

[7]  Bengt Holmstrom,et al.  Moral Hazard in Teams , 1982 .

[8]  Peter J. Carnevale,et al.  Negotiation in Social Conflict , 1993 .

[9]  Max H. Bazerman,et al.  Negotiating over Time: Impediments to Integrative Solutions , 1995 .

[10]  David M. Messick,et al.  Negotiation as a Social Process , 1995 .

[11]  James R. Frederickson,et al.  Budgeting: An Experimental Investigation of the Effects of Negotiation , 2000 .

[12]  R. Lewicki.  Negotiation: Readings, Exercises and Cases , 1993 .

[13]  M. Weitzman.  The 'Ratchet Principle' and Performance Incentives , 1980 .

[14]  J. Ledyard.  Public Goods: A Survey of Experimental Research , 1994 .

[15]  Richard G. Sloan,et al.  Annual bonus schemes and the manipulation of earnings , 1995 .

[16]  S. Young.  PARTICIPATIVE BUDGETING - THE EFFECTS OF RISK-AVERSION AND ASYMMETRIC INFORMATION ON BUDGETARY SLACK , 1985 .

[17]  Richard I. Henderson,et al.  Compensation Management in a Knowledge-Based World , 1996 .

[18]  Social context in tacit bargaining games: Consequences for perceptions of affinity and cooperation , 1995 .

[19]  W. R. Lalli.  Handbook of Budgeting , 1987 .

[20]  L. Thompson.  Negotiation behavior and outcomes: Empirical evidence and theoretical issues. , 1990 .

[21]  Andrew J. Leone,et al.  Empirical Tests of Budget Ratcheting and its Effect on Managers' Discretionary Accrual Choices , 2001 .

[22]  Kim,et al.  Social conflict: Escalation, stalemate, and settlement , 1986 .

[23]  C. Chow,et al.  The effects of pay schemes and ratchets on budgetary slack and performance: A multiperiod experiment☆ , 1991 .

[24]  James R. Frederickson,et al.  Carrot or Stick? Contract Frame and Use of Decision-Influencing Information in a Principal-Agent Setting , 2005 .

[25]  W. Hamilton,et al.  The Evolution of Cooperation , 1984 .

[26]  David M. Saunders,et al.  Negotiation: Readings, exercises, and cases, 3rd ed. , 1999 .

[27]  Gregory E. Kersten,et al.  Modeling Distributive and Integrative Negotiations. Review and Revised Characterization , 2001 .

[28]  J. Kagel,et al.  Handbook of Experimental Economics , 1997 .

[29]  Harold H. Kelley,et al.  Effects of extremity of offers and concession rate on the outcomes of bargaining. , 1972 .

[30]  Madan M. Pillutla,et al.  BEING FAIR OR APPEARING FAIR: STRATEGIC BEHAVIOR IN ULTIMATUM BARGAINING , 1995 .

[31]  M. Weitzman.  The new Soviet incentive model , 1976 .

[32]  Onne Janssen,et al.  Concern for the other's goals: Key to (de-)escalation of conflict , 1996 .

[33]  M. Bazerman.  Judgment in Managerial Decision Making , 1990 .

[34]  Alvin E. Roth,et al.  Expecting Continued Play in Prisoner's Dilemma Games , 1983 .

[35]  Kevin J. Murphy,et al.  Performance Standards in Incentive Contracts , 1999 .

[36]  James R. Frederickson,et al.  The effect of information asymmetry on negotiated budgets: an empirical investigation , 2002 .

[37]  Douglas A. Wolfe,et al.  Nonparametric Statistical Methods , 1973 .

[38]  D. G. Pruitt,et al.  Accountability to constituents! A two-edged sword , 1984 .