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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Journal Articles

Budget Processes: Theory and Experimental Evidence

2007, Games and Economic Behavior

Jürgen von Hagen, Roy Gardner, Claudia Keser, Karl-Martin Ehrhart

Abstract

This paper studies budget processes, both theoretically and experimentally. We give a sufficient condition for top-down and bottom-up budget processes to have the same voting equilibrium. Furthermore, at a voting equilibrium, it is not always true, as often presumed, that a top-down budget process leads to a smaller overall budget than does a bottom-up budget process. To test the implications for budget processes of voting equilibrium theory, we conduct a series of 128 voting experiments using subjects in a behavior laboratory. The experimental evidence from these experiments is well organized by voting equilibrium theory, both at the aggregate level and at the individual subject level. In particular, subjects display considerable evidence of rationality in their proposals and votes. More complete information and fewer spending categories lead to greater predictive success of voting equilibrium theory, and reduce the time needed to reach a budget decision.

Citation

von Hagen, Jürgen, Karl-Martin Ehrhart, Roy Gardner, and Claudia Keser (2007), “Budget Processes: Theory and Experimental Evidence,” Games and Economic Behavior, 59:2, 279-292. 

Keywords

Budget processes; Voting equilibrium; Experimental economics