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.