Frederick W. Rankin
Washington University in St. Louis
Stephen Schwartz
SUNY at Binghamton
Richard A. Young
The Ohio State University
Abstract: An experiment is designed to investigate the role of a non-binding budgetary announcement made by an owner in mitigating a management control problem induced by asymmetric information. The announcement indicates for which reports by the manager the owner is willing to fund the project. The manager has private knowledge of the cost, incentive to overstate it, and the ability to do so undetected by the owner. The experiment consists of three treatments: (1) the owner fully commits to honor her announcement regarding how she will use the managers cost report, (2) no announcement and (3) the owner makes a non-binding announcement regarding how she will use the managers cost report. The first two treatments establish empirical benchmarks to gauge the effectiveness of the non-binding announcement. There are two main results. First, owners in the non-binding announcement treatment outperform owners in the no announcement treatment throughout the experiment. Second, subjects acting in the role of owners appear to use the non-binding announcement as a bluff in an attempt to convince manager that they will reject a profitable project more often than they intend. This strategy appears to be particularly effective for the owners in the first half of the experiment.
Back to Program
