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Budgeting, Psychological Contracts, and Budgetary Misreporting

Author

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  • Susanna Gallani

    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Ranjani Krishnan

    (Eli Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

  • Eric J. Marinich

    (Farmer School of Business, Miami University, Oxford, Ohio 45056)

  • Michael D. Shields

    (Eli Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

Abstract

This study examines the effect of psychological contract breach on budgetary misreporting. Psychological contracts are mental models or schemas that govern how employees understand their exchange relationships with their employers. Psychological contract breach leads to feelings of violation and can occur even when employees’ economic contracts are fulfilled. We study the effects of psychological contract breach on three common types of employee participation in budgeting that differ in the degree of employees’ influence over their approved budgets. These include affirmative budgeting (full influence), consultative budgeting (moderate influence), and authoritative budgeting (low influence). When organizations communicate that employees will be involved in budgeting, employees develop psychological contracts of affirmative budgeting. If employees subsequently experience authoritative or consultative budgeting, their psychological contracts are breached. Employees who experience psychological contract breach seek redress through budgetary misreporting. Experimental results indicate that psychological contract breach partially mediates the relation between budgeting type and budgetary misreporting. Results also indicate asymmetry in the effects of psychological contract breach versus repair. Effects of breach on budgetary misreporting persist even after the breach no longer occurs.

Suggested Citation

  • Susanna Gallani & Ranjani Krishnan & Eric J. Marinich & Michael D. Shields, 2019. "Budgeting, Psychological Contracts, and Budgetary Misreporting," Management Science, INFORMS, vol. 67(6), pages 2924-2945, June.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:6:p:2924-2945
    DOI: 10.1287/mnsc.2018.3067
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