Centralization versus Delegation in an Experimental Capital Budgeting Setting

Arnold, Markus C.; Gillenkirch, Robert M. (2011). Centralization versus Delegation in an Experimental Capital Budgeting Setting. Business research, 4(1), pp. 10-30. Springer 10.1007/BF03342724

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In an experiment, we model two stylized facts about capital budgeting practice, budgetary slack creation and delegation of decision-making authority. In our setting, under centralization, headquarters announces a budget, the division manager gives a cost report, and headquarters decides on the project. Under delegation, headquarters allocates a budget to the manager, and the manager is authorized to make the investment decision. We argue that the ability of headquarters to commit to a budget moderates the effect of delegation, and we find evidence in favor of our argument as there is an interaction effect of delegation and commitment to budgets. The effects of delegation are particularly strong when budgets are non-binding as delegation serves as a substitute for commitment in this case. This leads to smaller expenditures and to a higher headquarters’ payoff under delegation than under centralization. In contrast, when headquarters can commit to the budget, the descriptive data are consistent with our conjectures about the effects of honesty preferences, but the effects are too small to be significant.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Business Management > Institute for Accounting and Controlling > Managerial Accounting

UniBE Contributor:

Arnold, Markus Christopher

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

2198-2627

Publisher:

Springer

Language:

English

Submitter:

Lynn Carole Selhofer

Date Deposited:

11 Mar 2020 13:10

Last Modified:

15 Mar 2020 02:49

Publisher DOI:

10.1007/BF03342724

BORIS DOI:

10.7892/boris.141304

URI:

https://boris.unibe.ch/id/eprint/141304

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