A New Concept of Budget Evaluation with the Emphasis to Reduce Budgetary Slack
Budgetary slack describes deliberately created slack in participative budgeting settings by the agent spending the budget. Truth-inducing compensation schemes for the agent were designed to tackle budgetary slack by incentivizing the agent to state his truly needed budget. But as previous truth-inducing compensation schemes lack to include multiple determinants of budgetary slack, this paper tries to tackle this issue by providing a new set of compensation schemes on the basis of previous schemes. A setting is developed in which the principal offers a budget to the agent with the intention of inducing the agent to try for a lower budget if that is in the best interest of the company. Such a procedure may result in an even higher project cost. This is a novel setting and contributes to the many settings that already exist in the current literature. A detailed step-by-step solution is offered to show how the necessary variables can be defined. This paper shows analytically that the developed compensation schemes induce the agent to act in the best interest of the principal in the given setting. Furthermore, the results are backed and visualised by graphs to ease understanding and provide support for the analytical reasoning.