Title: The optimal level of budgetary goal difficulty: an experimental study

Authors: Joe Dowd, William McGonigle, Arsen Djatej

Addresses: Eastern Washington University, 668 North Riverpoint Blvd., Ste A, Spokane, WA 99202, USA. ' Eastern Washington University, 668 North Riverpoint Blvd., Ste A, Spokane, WA 99202, USA. ' Malik & Seeme Hasan School of Business, Colorado State University-Pueblo, 2200 Bonforte Blvd., Pueblo, CO 81001-4901, USA

Abstract: Budgets are commonly used for multiple purposes. Whereas planning budgets reflect organisations| |best guesses| of future events, control budgets are intended to motivate high levels of effort. Budgetary control mechanisms modelled in a principal-agent setting typically find that the use of such schemes is Pareto optimal only when the budgetary goals are set to very difficult levels. This project studies how individual effort levels vary with different levels of goal difficulty in an experimental setting. We use a between-subjects factorial design. Subjects are assigned to either linear or budget-based compensation schemes at levels of goal difficulty ranging from 10% to 50% probability of goal attainment after controlling for skill and learning effects. An ink-stamping task is used to measure subjects| effort levels. Results indicate that the optimal level of budgetary goal difficulty may be less than that prescribed by information economics models.

Keywords: accounting; budgets; experiments; budgetary control; budgetary goals; budgetary goal difficulty; linear compensation; budget-based compensation; goal attainment probability; skills effects; learning effects; information economics; modelling.

DOI: 10.1504/IJMFA.2010.033288

International Journal of Managerial and Financial Accounting, 2010 Vol.2 No.2, pp.153 - 160

Published online: 20 May 2010 *

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