An Experimental Examination of the Effects of Information Control on Budget Reporting with Relative Project Evaluation

Abstract

ABSTRACT This paper examines the effects of providing information about coworkers' costs on binding, noncredible commitments and collusion in a capital budgeting setting with relative project evaluation. Two subordinates with asymmetric information regarding project costs report to a superior who pre-commits to funding rules that potentially ration resources. Rationing is credible only for the most restrictive rule, according to the wealth-maximizing model. When subordinates can observe each other's cost, it can increase collusion by facilitating coordination or potentially affecting equity motives. The results of my experiment reveal that noncredible commitments are generally effective at controlling information rents. Further, credible and noncredible commitments are more effective when subordinates cannot observe their peer's costs. When subordinates can observe costs, they condition reports on the higher costs of a peer. The results suggest the effectiveness of informal controls may depend on the information environment. JEL Classifications: M41; C72; C92. Data Availability: The data are available from the author on request.