Participative Budgeting, Psychological Contracts, and Honesty of Communication

Abstract

This study provides experimental evidence on the effects of breach of subordinates’ psychological contracts on honesty of communications under participative budgeting. While participative budgeting can improve economic outcomes, it can also establish psychological contracts whereby subordinates expect their superiors to fulfill the promise of participation. When these expectations are not met, subordinates’ psychological contracts are breached leading to feelings of violation. To redress the breach, subordinates will respond with less honest budgetary communications relative to subordinates whose psychological contracts are fulfilled. Importantly, psychological contract breach can occur even when the terms of the economic contract are fulfilled. Experimental results indicate that breach of subordinates’ psychological contracts of participative budgeting is associated with lower levels of honesty, even when there is no economic benefit from dishonest communication. Furthermore, the effects of previous psychological contract breach on honesty persist into future periods, even when psychological contracts are no longer breached.