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Groves Mechanism vs. Profit Sharing for Corporate Budgeting - An Experimental Analysis with Preplay Communication

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  • Markus Arnold
  • Eva Ponick
  • Heike Schenk-Mathes

Abstract

This paper experimentally explores the efficiency of the Groves mechanism and a profit sharing scheme in a corporate budgeting context. Specifically, it examines the effects of anonymous communication on both incentive schemes. The results show that although the Groves mechanism is analytically superior to the profit sharing scheme, the latter turns out to be advantageous for headquarters in our experiment. This is essentially due to the effects of communication on both incentive schemes. Under the profit sharing scheme, communication improves coordination and reduces inefficient resource allocation. Under the Groves mechanism, however, it leads to stable collusion strategies of the participants, and thus increases compensation costs.

Suggested Citation

  • Markus Arnold & Eva Ponick & Heike Schenk-Mathes, 2008. "Groves Mechanism vs. Profit Sharing for Corporate Budgeting - An Experimental Analysis with Preplay Communication," European Accounting Review, Taylor & Francis Journals, vol. 17(1), pages 37-63.
    • Handle: RePEc:taf:euract:v:17:y:2008:i:1:p:37-63
    DOI: 10.1080/09638180701819980
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    References listed on IDEAS

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    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
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    Cited by:

    1. Staci A. Kenno & Michelle C. Lau & Barbara J. Sainty, 2018. "In Search of a Theory of Budgeting: A Literature Review," Accounting Perspectives, John Wiley & Sons, vol. 17(4), pages 507-553, December.
    2. Iris Lorscheid & Bernd-Oliver Heine & Matthias Meyer, 2012. "Opening the ‘black box’ of simulations: increased transparency and effective communication through the systematic design of experiments," Computational and Mathematical Organization Theory, Springer, vol. 18(1), pages 22-62, March.
    3. Jennifer Kunz & Stefan Linder, 2011. "ZP-Stichwort: Vignetten-Experiment," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 21(2), pages 211-222, January.
    4. Christian Daumoser & Bernhard Hirsch & Matthias Sohn, 2018. "Honesty in budgeting: a review of morality and control aspects in the budgetary slack literature," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(2), pages 115-159, August.
    5. Christian Lohmann & Sandro Lombardo, 2014. "Resource allocation within a budgeting game: truthful reporting as the dominant strategy under collusion," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 25(1), pages 33-54, September.

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