Costly Budget Negotiations and Financial Distress : an Experimental Investigation

Arnold, Markus Christopher (14 August 2011). Costly Budget Negotiations and Financial Distress : an Experimental Investigation. In: AAA Annual Meeting. 10.2139/ssrn.1909536

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This experiment studies how exogenous constraints for the superior affect superiors’ and subordinates’ behavior during and after budget negotiations. The factors studied are negotiation costs and financial distress. Both factors have in common that they impair the superior’s situation and leave the subordinate’s position unchanged but differ with respect to the degree of the superior’s dependency on the subordinate. I find that only financial distress, i.e., the restriction that cannot be removed by the superior on her own, leads to more cooperative behavior of both parties during the negotiation. However, after the budget setting process, the subordinate’s motivation loss that can be observed in the baseline treatment is strongly mitigated by the existence of any exogenous factors. Moreover, the subsequent analysis reveals that the subordinate’s behavior is affected by procedural justice perceptions in the baseline treatment but no longer when exogenous restrictions exist.

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