THE EFFECT OF FAIRNESS IN CONTRACTING ON THE CREATION OF BUDGETARY SLACK

Abstract

This paper explores the relationship between fairness in contracting and the creation of budgetary slack. A laboratory experiment was performed in which privately informed subjects were compensated under either a truth-inducing or slack-inducing incentive contract. Contracting processes were either fair or unfair as defined by procedural justice theory (Leventhal, 1980; Lind & Tyler, 1988). Under the slack-inducing contract, subjects exposed to the fair contracting process created significantly less slack than subjects exposed to the unfair contracting process. Slack created by subjects compensated under the truth-inducing contract was low and insensitive to the fairness or unfairness of the contracting process employed.

Citation

Libby, T. (2003), "THE EFFECT OF FAIRNESS IN CONTRACTING ON THE CREATION OF BUDGETARY SLACK", Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 6), Emerald Group Publishing Limited, Leeds, pp. 145-169. https://doi.org/10.1016/S1474-7979(03)06007-1