The effect of information asymmetry on negotiated budgets: an empirical investigation

Abstract

This study examines three issues: (1) the effect of information asymmetry on the budget negotiation process, (2) the effect of information asymmetry on budgetary slack when budgets are set through a negotiation process, and (3) whether subordinates consider superiors imposing a budget following a failed negotiation as being low in procedural justice, which in turn causes low subordinate performance. The results suggest that smaller differences in initial negotiation positions do not indicate a higher likelihood of agreement when initial differences are due to differential information symmetry. Further, information asymmetry affects the relationship between negotiation agreement and budgetary slack. Last, inconsistent with a pure economic perspective, having superiors impose a budget after a failed negotiation causes justice or fairness considerations to demotivate subordinates.