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

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 supe...

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Bibliographic Details
Published in:The European accounting review 2008-05, Vol.17 (1), p.37-63
Main Authors: Arnold, Markus C., Ponick, Eva, Schenk-Mathes, Heike Y.
Format: Article
Language:English
Subjects:
Budgeting
Business management
Business strategies
Communication
Corporate governance
Economic models
Incentive plans
Profit sharing
Profit sharing plans
Resource allocation
Studies
Utility functions
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Summary: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.
ISSN:0963-8180
1468-4497
DOI:10.1080/09638180701819980