The Impact of Reputation and Variance Investigations on the Creation of Budget Slack

Thanks to the two anonymous reviewers for helpful comments. This paper has also benefited from suggestions made Abstract Experimental research and survey studies have yielded conflicting findings about the conditions under which budget slack is likely to arise. This study begins to reconcile the contradictory evidence by examining the impact of two features of the organizational context in which budget decisions are made: reputation concerns and variance investigations. The results of a laboratory experiment show concern for maintaining a favourable reputation leads to lower budget slack as does the existence of a variance investigation policy. The findings extend the agency theory framework by incorporating both pecuniary and non-pecuniary features that influence behavior when budgets have consequences beyond the immediate period. The results also suggest reputation concerns and control system features may serve as cost-effective substitutes for exhaustive incentive contracting in practical settings.