Accounting, Organizations and Society 31 (2006) 511528

www.elsevier.com/locate/aos

Budget negotiations in multi-period settings

a,*
Joseph G. Fisher , James R. Frederickson b, Sean A. Peer c

a
Department of Accounting, Kelley School of Business, Indiana University, Bloomington, IN 47405, USA
b
Melbourne Business School, The University of Melbourne, Carlton, VIC 3053, Australia
c
Von Allmen School of Accountancy, Gatton College of Business and Economics, University of Kentucky, Lexington,
KY 40506-0034, USA

Abstract

Budgets are typically set through a negotiation process that is repeated in successive periods, often between the same
superior and subordinate. Despite this, little is known about budget negotiations in multi-period settings. Temporal
interdependence is a fundamental aspect of budget negotiations in multi-period settings, and it refers to the fact that
in multi-period budget settings, superiors (subordinates) decisions and actions in one period can be inuenced by sub-
ordinates (superiors) decisions and actions in earlier periods and, in turn, can inuence subordinates (superiors) deci-
sions and actions in later periods. We report the results of an experiment that addresses two issues related to temporal
interdependence.
The rst issue we examine is the eect of an expectation of future budget negotiations with the same individual on
current period negotiation strategies and outcomes. Consistent with our expectations, our results indicate that superiors
and subordinates who expect future budget negotiations act more cooperatively. For example, when superiors and sub-
ordinates expect future budget negotiations, they are more likely to reach agreement on a budget and subordinate per-
formance is higher. The second issue focuses on a multi-period setting with repeated budget negotiations between the
same individuals. We examine the pattern of negotiation outcomes across periods to assess the eect of prior budget
outcomes on current period negotiation strategies and outcomes. Our results indicate that in this setting, superiors
and subordinates react to negotiation strategies and outcomes from prior periods in predictable ways. For example,
once a particular superior and subordinate reached agreement, they were more likely to continue to reach agreement
in future periods. In addition, superiors initial negotiation positions across periods and the budget levels across periods
were consistent with superiors using subordinate performance in the prior period to update their beliefs about subor-
dinate performance capability. One implication of our results is that some issues identied in prior, single-period bud-
geting research do not generalize to the multi-period setting where there is temporal interdependence.
2005 Elsevier Ltd. All rights reserved.

*
Corresponding author. Tel.: +1 812 855 3705; fax: +1 812 855 4985.
E-mail address: josher@indiana.edu (J.G. Fisher).

0361-3682/$ - see front matter 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2005.12.008
512 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
Introduction
Almost all rms engage in budgeting, and bud-
gets typically are set through a negotiation process
(Anthony & Govindarajan, 2001; Umapathy,
1987). Despite this, only a few studies have exam-
ined budget negotiations (e.g., Fisher, Frederick-
son, & Peer, 2000, 2002), and these studies have
focused on single-period settings. Budget negotia-
tions in practice typically are not a one-time event,
but, rather, a process that is repeated in successive
periods, often between the same superior and sub-
ordinate. As Mannix, Tinsley, and Bazerman
(1995) suggest, individuals engaged in a series of
similar tasks are likely to behave dierently than
individuals performing a task only once. Thus,
given that budget negotiations between the same
individuals in multi-period settings are common,
it is important to understand negotiation strategies
and outcomes in such settings. In addition, given
that prior research has focused on one-shot (i.e.,
single period) negotiations, it is important to
understand how fundamental factors that distin-
guish repeated negotiations with the same individ-
ual from one-shot negotiations aect budget
negotiation strategies and outcomes.
Budget negotiations in single-period settings
create intra-period interdependence between supe-
riors and subordinates because their respective
payos for the period depend on each others deci-
sions and actions in that period (Lewicki, Litterer,
Minton, & Saunders, 1994). In multi-period set-
tings, not only is there intra-period interdepen-
dence but also temporal interdependence. That
is, superiors (subordinates) decisions and actions
in one period can be inuenced by subordinates
(superiors) decisions and actions in earlier periods
and, in turn, can inuence subordinates (superi-
ors) decisions and actions in later periods. Tempo-
ral interdependence is a fundamental feature of
budget negotiations in multi-period settings. The
existence of temporal interdependence suggests
that negotiations in a multi-period setting may
have dierent outcomes than a one-shot
negotiation.
In this study, we examine two aspects of tempo-
ral interdependence. The rst aspect is an expecta-
tion of future interactions with the same
individual, which is a necessary condition for tem-
poral interdependence to exist. We examine
whether this aspect of temporal interdependence
aects budget negotiation strategies and outcomes.
Specically, we examine the eect of the presence
versus absence of an expectation of future budget
negotiations with the same individual on negotia-
tion strategies and outcomes. We compare two set-
tings where the only dierence between the settings
is the knowledge of future or no future budget
interactions. We view this issue as an important
rst step in moving the budget negotiation litera-
ture from a single-period setting to a multi-period
setting. The results from our experiment indicate
that superiors and subordinates who expect future
budget negotiations have smaller dierences in
their initial negotiation positions and are more
likely to reach agreement on budgets. In addition,
subordinates who expect future budget negotia-
tions have higher performances, both in absolute
terms and relative to their budgets, than do subor-
dinates who do not expect future budget negotia-
tions. This performance eect is due primarily to
subordinates in dyads that fail to reach budget
agreement. For these subordinates, those who do
not expect future budget negotiations perform sig-
nicantly below their budgets, whereas those who
expect future budget negotiations do not.
The second aspect of temporal interdependence
we consider is that individuals can learn from and
react to negotiation strategies and outcomes from
prior periods, which is the dening aspect of tem-
poral interdependence. Specically, we focus on a
multi-period setting with repeated budget negotia-
tions between the same individuals and provide
evidence about the eect of prior budget negotia-
tions and outcomes on current period negotiation
strategies and outcomes by examining the pattern
of negotiation strategies and outcomes across peri-
ods. Our results indicate that superiors and subor-
dinates in a repeated multi-period setting react to
prior budget negotiations and outcomes in predict-
able ways. The dierence between superiors and
subordinates initial negotiation positions
decreases across periods, and the likelihood of
negotiation agreement increases. Further, the like-
lihood of budget agreement in a subsequent period
also depends on the prior period. Once a particular
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
superior and subordinate reach agreement, they
are more likely to continue to reach agreement in
future periods. Finally, superiors initial negotia-
tion positions across periods and the budget levels
across periods each reect subordinate perfor-
mance in the prior period, consistent with superi-
ors using subordinate performance in the prior
period to update their beliefs about subordinate
performance capability. Specically, superiors
pursue higher (lower) budgets when subordinate
performance in the preceding period exceeded
(lagged) the budget.
Our results have several implications for
research and practice. First, we extend the budget
negotiation literature (e.g., Fisher et al. 2000,
2002) from a single-period setting to a multi-per-
iod setting, which is a very common setting found
in practice. Moreover, because temporal interde-
pendence is a fundamental dierence between sin-
gle-period budget negotiations and multi-period
budget negotiations, our results suggest that
results from studies that used single-period bud-
geting settings may not easily generalize to multi-
period settings.
Second, our results for superiors initial negoti-
ation positions across periods and the budget lev-
els across periods are consistent with superiors
engaging in ratcheting. Ratcheting refers to a bud-
geting process where the current periods budget
equals the preceding periods budget plus an
adjustment (i.e., ratchet) based on actual output
relative to the budget in the preceding period
(Chow, Cooper, & Haddad, 1991; Leone & Rock,
2002; Weitzman, 1976, 1980). In addition, our
experiment provides insights on two aspects of
superior ratcheting behavior. The rst is that the
degree of adjustment in both the superiors initial
negotiation positions and the budget levels
reected only a relatively small portion of the dif-
ference in the preceding period between the subor-
dinates performance and the budget, regardless of
whether subordinate performance in the preceding
period exceeded or lagged the budget. The second
item is that the magnitudes of the upward and
downward ratchets generally were equal (i.e., sym-
metrical ratcheting), which contrasts with Leone
and Rocks (2002) nding, based on budgeting at
one rm, of asymmetrical ratcheting.
513
Finally, our results indicate that temporal inter-
dependence has performance benets. Firms might
be able to increase the benets induced by tempo-
ral interdependence by making interdependence
more salient to its employees. Firms, therefore,
may want to emphasize to employees the repeated
nature of budgeting, as well as ongoing relations in
the rm, particularly when superiors impose a
budget following a failed negotiation.
The remainder of the paper is organized as fol-
lows: The setting and background are described in
Setting section, and hypotheses are developed
in Hypotheses section. We explain the method in
Method section and present the results in Results
section. The paper concludes with a discussion of
the results in Discussion section.
Setting
Consider the following setting. There are supe-
rior and subordinate dyads where subordinates
provide a productive input, and it is common
knowledge that there are multiple production peri-
ods. Superiors and subordinates are compensated
in each period according to the following
contracts:1

F if X 6 B
P subordinate 1
F AX  B if X > B

RDX  F if X 6 B
P superior
RfDX  F AX  Bg if X > B
2
where P: compensation; F: subordinate xed com-
pensation; A: subordinate compensation per unit
of production over budget, X: actual production;
B: budget; D: protability, exclusive of subordi-
nate compensation, per unit produced; R: supe-
riors percentage of rm protability.
1
We selected the subordinates contract because of its
theoretical importance (e.g., Demski & Feltham, 1978; Holm-
strom, 1982; Weitzman, 1980) and its common use in practice
and research (Atkinson, Banker, Kaplan, & Young, 2001;
Crystal, 1993; Dillard & Fisher, 1990; Henderson, 2000;
Milgrom & Roberts, 1992; Murphy, 2000). The superiors
contract is simply a residual contract.
514 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
Superiors do not know the performance capa-
bility of their particular subordinate at the begin-
ning of the rst period, whereas subordinates
know their own performance capability. The two
parties are aware of both incentive contracts.
The superiors and subordinates determine the
budget via a negotiation process. In the negotia-
tion, subordinates make the initial budget pro-
posal, consistent with bottom-up processes
(Anthony & Govindarajan, 2001; Chandra,
1993), and superiors have the right to set the bud-
get in the event of a negotiation impasse, consis-
tent with most budgeting processes in practice
(Umapathy, 1987). Once dyads set a budget for
the period, subordinates exert eort in the work
period, which in turn determines their perfor-
mance and rm revenues for the period. At the
end of the period, the dyad is informed of the sub-
ordinates performance.
Weitzman (1976, 1980) notes that in multi-per-
iod budgeting settings where subordinates are
compensated via budget-based contracts that
reward over performing the budget, such as the
contract in Eq. (1), two incentive problems exist:
a static incentive problem and a dynamic incentive
problem. The former refers to the incentives subor-
dinates have in any given period to misrepresent
their private information in order to get a low bud-
get for that period, making it easier to earn a lar-
ger bonus in that period.2 The dynamic incentive
problem, which is a manifestation of temporal
interdependence, arises as a reaction to the poten-
tial for superiors to engage in ratcheting. Ratchet-
ing refers to the natural tendency of superiors who
are not fully informed about subordinates perfor-
mance capabilities to use current performance as a
basis for the budget in the next period (Weitzman,
1980). With ratcheting, next periods budget
equals the current periods budget plus an adjust-
ment (i.e., ratchet), with the adjustment based on
2
The static incentive problem is present in both single-period
budgeting settings and multi-period budgeting settings.
Research on budgetary slack (see, e.g., Chow, Cooper, &
Waller, 1988; Frederickson & Cloyd, 1998; Waller, 1988;
Young, 1985; Young, Fisher, & Lindquist, 1993) generally
has focused on the static incentive problem in single-period
settings.
actual output relative to the budget in the current
period (Chow et al., 1991; Leone & Rock, 2002;
Weitzman, 1976, 1980).3 Subordinates who believe
that superiors will engage in ratcheting may have
incentives to curtail performance in the current
period to avoid a higher budget in the next period
(Weitzman, 1980).4
Given their contract in Eq. (2), superiors prefer
high subordinate eort and, for revenue sharing
purposes, high budgets. Therefore, the static and
dynamic incentive problems imply conicts
between superiors and subordinates. Specically,
the static incentive problem implies conict
between superiors and subordinates about the
desired budget level for a given level of subordi-
nate performance while the dynamic incentive
problem may result in conict between them about
the desired subordinate performance level for a
given budget level.
Budget negotiations allow superiors and subor-
dinates to explicitly address their conict about the
budget level. In addition, budget negotiations also
allow them to indirectly address the second conict
because the negotiation process, as well as the
resulting budget, may inuence subordinate per-
formance. The contracts in Eqs. (1) and (2) create
intra-period interdependence between superiors
and subordinates because their respective payos
in a particular period are inuenced by the others
decisions and actions in that period (Lewicki et al.,
1994). There also is temporal interdependence
because superiors (subordinates) decisions and
actions in one period can be inuenced by subordi-
nates (superiors) decisions and actions in earlier
periods and, in turn, can inuence subordinates
(superiors) decisions and actions in later periods.
3
Weitzman (1980, p. 303) refers to the adjustment as a
ratchet because current performance acts like a notched wheel
in xing the point of departure for next periods target. With
full ratcheting, prior period performance is the lower limit for
subsequent budget targets (Leone & Rock, 2002). Holthausen,
Larcker, and Sloan (1995) provide an example of a full
ratcheting process at H. J. Heinz Company. At this company,
budgets were set at the greater of 115% of prior period
performance or 115% of the prior period budget.
4
The subordinates motivation to curtail performance
depends on several factors, most importantly on the magnitude
of the ratchet adjustment factor.
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
In the next section we discuss the eect of temporal
interdependence on negotiation strategies and
outcomes.
Hypotheses
As indicated previously, we examine two
aspects of temporal interdependence. The rst is
the eect of knowledge of future interactions with
the same individual or the knowledge of no future
interactions. The second aspect is the pattern of
negotiation strategies and outcomes in a multi-per-
iod setting with repeated negotiations between the
same individuals. As discussed in more detail
below, prior research suggests that interaction
length can aect cooperation between individuals.
Therefore, we rst dene a cooperative outcome in
our budget negotiation setting prior to formally
developing our hypotheses.
Cooperation in budget negotiations
In integrative situations, a cooperative solution
generates a higher joint payo than a competitive
solution (Bazerman, 1998; Pruitt, 1981; Rubin,
Pruitt, & Kim, 1994).5 Prior studies that have
addressed cooperative versus competitive behav-
ior generally have used integrative settings where
the link between the negotiation and the joint
payos is clear, making it relatively easy to distin-
5
Negotiations can be either distributive or integrative. In a
distributive negotiation, the parties are negotiating over a xed
sum, resulting in a zero-sum game where a gain for one party
causes an equal loss for the other (Kersten, 2001; Pruitt, 1981).
Compromise could be considered a cooperative solution for
such negotiations. In contrast, in an integrative negotiation,
there exists the possibility to increase the magnitude of the
payo that will be split between the parties. An integrative (i.e.,
cooperative) solution reconciles the interests of both parties and
results in a higher joint prot than provided by either party
getting their respective preferred solution (Bazerman, 1998;
Pruitt, 1981; Thompson, 1990). Because integrative solutions
focus on the joint payo, they often result in the parties being
individually worse o, compared to their respective preferred
solutions (Pruitt, 1981; Rubin et al., 1994). Integrative solutions
that make both parties strictly better o compared to non-
cooperative solutions are called fully integrative (Rubin et al.,
1994).
515
guish cooperative from competitive behavior. For
example, in the standard Prisoners Dilemma
game, the joint payo is public information, and
varies from low in the competitive solution to
moderate in the mixed solution to high in the
cooperative solution.
Dening cooperative outcomes in budget
negotiations is more dicult because the link
between the negotiation and the joint payo is
less clear. Unlike negotiation settings typically
used in the negotiation literature, superiors and
subordinates in budget negotiations do not
explicitly negotiate the factor that determines
the total joint payo. That is, superiors and sub-
ordinates do not directly negotiate the subordi-
nates performance level, which is the factor
that determines rm revenues. Instead, superiors
and subordinates negotiate the budget level,
which in turn may aect subordinate perfor-
mance and thus rm revenues.6
We use the two sources of conict between
superiors and subordinates in multi-period budget
settings that we identied earlier (i.e., subordinate
performance level and the budget level) to dene a
cooperative solution in budget negotiation set-
tings. Specically, we dene a cooperative solution
by two factors: high subordinate performance and
negotiation agreement. High subordinate perfor-
mance maximizes the joint payo available to the
superior and subordinate, consistent with the con-
cept of an integrative solution. Negotiation agree-
ment implies that the superior and subordinate
resolved their conict about the budget level and
indicates an implicit agreement about the division
of rm revenues between them.
6
An additional complication is that budget negotiations
contain aspects of both integrative and distributive negotia-
tions. Budget negotiations are integrative in that the negotia-
tions and/or resulting budget have the potential to aect the
amount of rm revenues, which is the joint payo to the
superior and subordinate. Budget negotiations are distributive
in that for a xed subordinate performance level, the budget
determines how rm revenues are divided between the superior
and subordinate. For performance above the budget, a higher
budget results in a larger portion of rm revenues being
allocated to the superior while decreasing the portion allocated
to the subordinate.
516 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
Expectation of future budget negotiations
In our setting, an expectation of future negotia-
tions with the same individual is a necessary condi-
tion for temporal interdependence. In this section,
we address the eect of the presence versus absence
of such expectations. We argue below that an
expectation of future negotiations will cause indi-
viduals to act more cooperatively, resulting in
more cooperative outcomes.
A model of conict resolution, the dual concern
model (Pruitt & Rubin, 1986; Rubin et al., 1994)
argues that the degree to which an individual pur-
sues a cooperative solution depends on the relative
strength of two factors: (1) the individuals con-
cern about his/her own outcomes in the current
conict (i.e., self-interest) and (2) the individuals
concern about the others outcomes in the current
conict (i.e., other-interest). Although concern for
the other can be genuine, implying an intrinsic
interest in the welfare of the other, it is more com-
monly instrumental (Pruitt & Carnevale, 1993;
Pruitt & Rubin, 1986; Rubin et al., 1994). That
is, in resolving the current conict, individuals
act as if they are concerned about the other
because doing so has strategic benets.
Regardless of whether it is genuine or instru-
mental, concern for the other is what distinguishes
cooperative behavior from competitive behavior
(Janssen & van de Vliert, 1996; Larrick & Blount,
1995; Pruitt & Carnevale, 1993). Competitive
behavior occurs when concern for the other is
weak. In contrast, when concern for the other is
strong, individuals are motivated to pursue coop-
erative strategies to resolve the conict, either by
yielding to the other party (if self-interest is weak)
or by collaborating with the other (if self-interest is
strong). If both parties employ collaboration, the
result is a cooperative solution to the conict.
Thus, any increase in concern for the other should
cause the individual to act more cooperatively,
regardless of whether the increased concern is gen-
uine or instrumental.
Contextual factors can aect the strength of con-
cern for the other, and thus aect the degree to
which individuals act cooperatively. Two contex-
tual factors posited to create instrumental concern
are interdependence and expected future interac-
tions (Greenhalgh, 1999; Mannix et al., 1995;
Rubin et al., 1994). The latter creates a rational
expectation of temporal interdependence (Mannix
et al., 1995), creating incentives to develop a work-
ing relationship with the other by acting coopera-
tively (Pruitt & Carnevale, 1993; Rubin et al.,
1994). For example, individuals who expect future
interactions with the same individual may be will-
ing to forgo current benets and receive a smaller
current payo in an eort to create sustainable
cooperative solutions across future periods, even
though such solutions are not enforceable ex-post
in any given period. Such joint cooperative behav-
ior maximizes the present value of the individuals
respective payos relative to a series of non-cooper-
ative solutions. Results from buyer-seller negotia-
tions (e.g., Ben-Yoav & Pruitt, 1984a, 1984b;
Mannix et al., 1995), repeated Prisoner Dilemma
games (e.g., Axelrod, 1990; Murnighan & Roth,
1983), and public goods games (Ledyard, 1995)
are consistent with individuals who expect future
interactions acting more cooperatively.
Recall that in our budget negotiation setting,
there is intra-period interdependence between
superiors and subordinates, and it exists regardless
of the expectation of future budget negotiations.
This suggests that regardless of whether they
expect future negotiations, superiors and subordi-
nates may have some degree of concern for each
other. However, consistent with the discussion
above, superiors and subordinates who expect
future negotiations have an additional reason to
exhibit concern for the other in the current period:
to inuence the others decisions and actions in
future periods. Thus, superiors and subordinates
who expect future budget negotiations have
greater incentive to act cooperatively in the current
period than do those who do not expect future
budget negotiations. Below we discuss how greater
cooperation aects specic negotiation strategies
and outcomes.
Initial negotiation positions
The static incentive problem (Weitzman, 1976,
1980) creates a conict between superiors and sub-
ordinates about the desired budget level, regardless
of the expectation of future budget negotiations,
implying a dierence in superiors and subordi-
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
nates initial negotiation positions. However, con-
sistent with an expectation of future interactions
increasing concern for the other and thus inducing
cooperation, the dierence should be smaller for
dyads that expect future budget negotiations
because less extreme initial negotiation positions
typically are considered to signal more cooperative
behavior than do more extreme initial negotiation
positions (Benton, Kelley, & Liebling, 1972; Fisher
et al., 2000; Pruitt & Carnevale, 1993).
H1: The dierence between superiors and subor-
dinates initial negotiation positions is smal-
ler for dyads that expect future budget
negotiations than for dyads that do not
expect future budget negotiations.
Negotiation agreement
Negotiation agreement is an important aspect
of budget negotiations because it aects subordi-
nate performance (Fisher et al., 2000, Fisher,
Frederickson, & Peer, 2002). Given our denition
of a cooperative solution in budget negotiation set-
tings, superiors and subordinates who expect
future budget negotiations are more likely to reach
budget agreement.
H2: The likelihood of negotiation agreement is
higher for dyads that expect future budget
negotiations than for dyads that do not
expect future budget negotiations.
Subordinate performance
Research shows that the factors that aect sub-
ordinate performance in single-period budget
negotiation settings dier depending on whether
the superiors and subordinates reached agreement
on a budget (Fisher et al., 2002). We, therefore,
address subordinate performance separately for
dyads that do and do not reach agreement to
assess the eect in each situation of an expectation
of future budget negotiations.
First consider dyads that do not reach agree-
ment. When faced with negotiation outcomes they
believe are unfair, individuals may retaliate and
act spitefully to harm the other party, even at their
517
own expense (Pillutla & Murnighan, 1995). Fisher
et al.s (2002) ndings are consistent with subordi-
nates in single-period budget negotiation settings
acting spiteful in response to superiors imposing
a budget following failed negotiations, even when
the imposed budgets were achievable. Specically,
subordinates in this situation signicantly under-
performed their budgets, thereby generating less
revenue for the superiors while foregoing a bonus
for themselves.
When superiors impose a budget following a
failed negotiation, we expect subordinates who
do not expect future budget negotiations to act
spiteful and signicantly under perform their bud-
gets. In contrast, subordinates who expect future
budget negotiations should have greater concern
for the other (even if only instrumental), which
in turn should motivate them to act more cooper-
atively. Given our denition of a cooperative solu-
tion in budgeting negotiation settings, acting more
cooperatively should cause subordinates to per-
form closer to the budget. We expect, therefore,
that when superiors impose a budget following a
failed negotiation, subordinates who expect future
budget negotiations will, at least partially, sup-
press their desire to act spiteful, resulting in a
smaller underperformance of the budget.
H3: For subordinates in dyads that fail to reach
agreement, subordinates who expect future
budget negotiations under perform the bud-
get by a smaller amount than do subordi-
nates who do not expect future budget
negotiations.
Now consider dyads that reach agreement.
Agreeing to a budget implies that subordinates
believe the budget is attainable (i.e., at or below
the subordinates performance capability) and
are committed to achieving the budget. Subordi-
nates who do not expect future budget negotia-
tions have incentives to maximize their
performance and over perform the budget up to
their performance capability in order to maximize
compensation. Because this performance level
maximizes the joint prot, this performance level
is the cooperative solution in a multi-period set-
ting. An expectation of future budget negotiations,
518 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
therefore, is not expected to aect the degree to
which subordinates in dyads that reach agreement
over perform the budget.
H4: For subordinates in dyads that reach agree-
ment, subordinates expectations about
future budget negotiations do not aect the
amount by which they over perform the
budget.
Taken together, H2H4 imply that performance
overall should be higher for subordinates who
expect future budget negotiations. Recall, how-
ever, that the dynamic incentive problem suggests
that subordinates who expect future budget nego-
tiations may have incentives to curtail current per-
iod performance if they anticipate that superiors
will ratchet (Weitzman, 1976, 1980). The dynamic
incentive problem, therefore, suggests that overall
subordinate performance will be lower for subor-
dinates who expect future budget negotiations.
This conclusion, however, may not be warranted
for at least two reasons. First, whether subordi-
nates do in fact have incentives to curtail perfor-
mance in the current period depends on several
factors such as the subordinates beliefs about
the size of the anticipated ratchet adjustment fac-
tor and interest rates (Weitzman, 1980). As the for-
mer increases or the latter decreases, subordinates
incentives to curtail performance in the current
period increase.7 Second, Weitzmans (1980) anal-
ysis does not consider potentially important fac-
tors such as negotiation agreement, spite, and
subordinates cognitive abilities to make the neces-
sary calculations. There are numerous experimen-
tal papers that demonstrate individuals do not
act consistent with economic predictions (e.g.,
Frederickson, 1992; Frederickson & Waller,
2005; Luft, 1994; Murnighan & Roth, 1983). Thus,
it is not clear whether the dynamic incentive prob-
lem provides a meaningful competing hypothesis
7
Subordinates essentially must tradeo the current rewards
from providing higher performance in the current period
against lower future rewards due to higher future budgets that
result from higher current performance (Weitzman, 1980). See
Weitzman (1980) for a detailed analysis of the dynamic
incentive problem.
for H3 and H4. We rely on our empirical results
to provide insight on this issue.
Negotiation strategies and outcomes
across periods
A dening aspect of temporal interdependence
is that individuals can learn from and react to
negotiation strategies and outcomes from prior
periods. In this section, we address whether
repeated negotiations with the same individual
aect negotiation strategies and outcomes across
periods in predictable ways. Specically, we focus
on a multi-period setting with repeated negotia-
tions between the same individuals and consider
the pattern of negotiation strategies and outcomes
across periods to assess the eect of prior budget
negotiations and outcomes on current period
negotiation strategies and outcomes.8 We address
two broad areas: (1) the eect of prior negotiation
agreement and (2) the eect of subordinate perfor-
mance in prior periods.
Eect of agreement
Achieving budget agreement indicates coopera-
tive behavior by both the superior and subordinate
(Pruitt & Carnevale, 1993). Research suggests that
8
Our focus in this section is on the pattern of negotiation
strategies and outcomes across periods in our multi-period
setting, not how outcomes dier across dierent multi-period
settings. We chose to focus on a multi-period setting with
repeated negotiations between the same individuals for two
reasons. The rst is that this setting is arguably the most
common setting in practice. The second reason is that repeated
negotiations with the same individual (as opposed to, for
example, negotiating with a dierent individual each period)
makes it easier for the parties to learn the others negotiation
strategies, and thus provides the most powerful setting for
ascertaining whether prior negotiations and outcomes aect
current period negotiation strategies and outcomes. Focusing
on only one setting, however, prevents us from ascertaining the
relevant importance of various factors inherent in our setting
(e.g., the eect of negotiating with a dierent individual each
period versus the incremental eect of negotiating with the same
individual each period). Nonetheless, our setting helps us better
understand multi-period budget negotiations and, potentially
more important, moves the budget negotiation literature from a
single-period setting to the more common multi-period setting.
It is left to future research to consider and compare dierent
formulations of the repeated budget setting.
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
once established, positive (i.e., cooperative) rela-
tionships tend to persist (see Pruitt & Carnevale,
1993, for a review). For example, once individuals
in multi-period Prisoners Dilemma games estab-
lish mutually cooperative behavior, they tend to
continue making cooperative choices (Lewicki
et al., 1994). This discussion implies that superiors
and subordinates are more likely to reach agree-
ment in the current period if they reached agree-
ment in the preceding period.
H5: In a multi-period setting with repeated nego-
tiations, the likelihood of a superior and sub-
ordinate reaching agreement is higher if they
reached agreement in the preceding period.
Eect of subordinate performance
Recall that there is information asymmetry
between superiors and subordinates at the begin-
ning of the rst period about the subordinates per-
formance capabilities. Subordinate performance
provides superiors with a signal about the subordi-
nates performance capabilities, potentially reduc-
ing the degree of information asymmetry.
Repeated observations of subordinate performance
across time allow superiors to more accurately
assess subordinates performance capabilities, fur-
ther reducing the degree of information asymmetry.
Thus, due to the observation of subordinate perfor-
mance across time, the degree of information asym-
metry should decrease across time.
Fisher et al. (2002) document a positive relation
between the degree of information asymmetry and
the magnitude of the dierence in superiors and
subordinates initial negotiation positions. In turn,
there is a negative relation between the magnitude
of the dierence in initial negotiation positions and
the likelihood of budget agreement. This discus-
sion suggests that over time, there should be both
a smaller dierence in superiors and subordinates
initial negotiation positions and a greater likeli-
hood of budget agreement.
H6: In a multi-period setting with repeated nego-
tiations, the dierence between superiors
and subordinates initial negotiation posi-
tions decreases over time.
519
H7: In a multi-period setting with repeated nego-
tiations, the likelihood of budget agreement
increases over time.
Consistent with analytical agency models (e.g.,
Weitzman, 1976, 1980), ratcheting is a logical
response by superiors when there is information
asymmetry between superiors and subordinates
about subordinates performance capabilities.
Superiors can use the subordinates performance
to update their beliefs about the subordinates per-
formance capabilities and then use those updated
beliefs in the current periods budget negotiations.
We, therefore, expect superiors to ratchet, imply-
ing that over performance (under performance)
of the budget in the preceding period will result
in a higher (lower) budget in the current period.
H8a: The current period budget reects ratcheting
based on subordinate performance in the
preceding period.
When subordinates over perform the budget in
the preceding period, superiors must decide
whether to act more competitively and pursue a
budget in the current period that equals the subor-
dinates performance (i.e., a full ratchet) or act
more cooperatively by allowing a lower budget.
Superiors dependence on subordinates to generate
rm revenues in the current period, as well as the
expectation of future budget negotiations with
the subordinates, suggests that superiors should
exhibit concern for the subordinates. Superiors
concern for subordinates should motivate them
to act cooperatively, implying that superiors will
not engage in full ratcheting.
H8b: In a multi-period setting with repeated nego-
tiations, the current period budget does not
reect full ratcheting when subordinates
over performed the budget in the preceding
period.
The situation is more complex when subordi-
nates under perform the budget because superiors
cannot distinguish whether the performance
reects subordinates performance capabilities or
shirking in an eort to game the budget process
520 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
and obtain a lower budget in the current period. If
superiors believe the performance reects
performance capabilities, the superiors interde-
pendencies with the subordinates give superiors
incentives to act cooperatively and seek a budget
below the subordinates performance. If superiors
believe the performance reects shirking, the inter-
dependencies with the subordinates still give supe-
riors incentives to act cooperatively. However, the
cooperative strategy in this situation is unclear.
Further, superiors could view subordinate shirking
as a non-cooperative act, which could decrease
their degree of concern for subordinates (Pruitt
& Carnevale, 1993) and in turn give superiors less
incentive to act cooperatively. Given the ambigu-
ity, we do not provide a prediction for this
situation.
Method
Participants and design
The participants were 58 undergraduate stu-
dents enrolled in intermediate accounting at a
large Midwestern university.9 Half the participants
were assigned to a multi-period condition. We
used participants responses in each period of this
condition to test the hypotheses about the pattern
of negotiation strategies and outcomes across peri-
ods. The remaining participants were assigned to a
single period condition (hereafter, no expectation
condition). We compared negotiation strategies
and outcomes from the no expectation condition
to the negotiation strategies and outcomes in the
rst period of the multi-period condition (hereaf-
ter, expectation condition) to test the hypotheses
about the eects of an expectation of future budget
negotiations. As explained below, it was common
knowledge at the beginning of the no expectation
condition that there would be only one period,
and thus no future budget negotiations. In con-
trast, it was common knowledge at the beginning
9
Participants received course credit for participation. Course
requirements called for students to either participate in exper-
iments or write a short paper. Almost all students opted for
experiment participation.
of the expectation condition that there would be
several periods, and thus future budget negotia-
tions with the same individual. The only dierence
between the two expectation conditions is that par-
ticipants in the former expected future budget
negotiations while participants in the latter did
not; this comparison controls for all other poten-
tially confounding factors.
Procedure
Participants completed the entire experiment,
except for the negotiation process, via computer.
The experimental procedure consisted of the fol-
lowing steps:
(1) The computer lab was partitioned into two
halves using a solid room partition. When partici-
pants arrived, they were assigned randomly to a
computer terminal, with half the participants
(i.e., superiors) seated on one side of the partition
and half (i.e., subordinates) on the other side.
Superiors and subordinates were paired anony-
mously, creating a total of 29 dyads.
(2) The rst few computer screens explained the
production task, which was adapted from Chow
(1983) and involved decoding numbers into letters.
Participants were issued a le folder containing a
dierent decoding key for each session. All partic-
ipants then completed a 3-min practice session to
ensure they understood the basic task.
(3) Subordinates next completed three, 3-min
training sessions to learn their performance capa-
bilities. They earned $0.02 for each item correctly
decoded and received instant feedback on the total
number of items correctly and incorrectly decoded.
After each session, subordinates received individ-
ual summary information on the number of items
attempted, correctly decoded, and incorrectly
decoded. After the last training session, subordi-
nates were asked for their best estimate of the
number of items they could correctly decode in
3 min.
Superiors also completed three, 3-min practice
sessions to familiarize them with the task. How-
ever, they were neither paid nor given feedback
to control for the eects of knowledge of their
own performance on the subsequent budget-
setting process.
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
(4) Participants in the no expectation (expecta-
tion) condition were told there would be only one
(several) work session(s), and thus the need to
engage in budget negotiations in only one
(several) period(s). Participants in the expectation
condition also were told that they would
be matched with the same individual for all
periods.
(5) The next computer screens rst described
the subordinates and superiors respective com-
pensation schemes for the work session, and then
described the budget-setting process. Their con-
tracts are described in Eqs. (1) and (2), respec-
tively, with F = $1.00, A = $0.05, D = $0.08, and
R = 100%.10 Both compensation schemes were
illustrated to all participants through several
numerical examples. Participants were told that
subordinates would make the initial budget pro-
posal, that the budget negotiations would last a
maximum of four rounds, and that superiors had
the authority to set the budget if there was not
agreement after four rounds.
(6) Participants next answered a series of fac-
tual questions about the number of periods, sub-
ordinate and superior compensation schemes,
and the budget-setting process. An incorrect
answer on a question returned participants to
the explanatory computer screens and then back
to the incorrectly answered question. These forced
manipulation checks ensured that participants not
only understood both the compensation schemes
and budget-setting process before beginning nego-
tiations, but, more importantly, that their expecta-
tions regarding future budget negotiations were
correct.
(7) Both superiors and subordinates were told
the performance range for the third training ses-
sion, based on the performance of other partici-
pants drawn from the same student population.
Participants were told, Prior studies of this same
task have shown that in the third training session
95% of the subordinates classify between 32 and
54 items correctly. From the third training ses-
sion, subordinates also knew their own perfor-
10
The minimum compensation for subordinates was F. All
superiors were endowed with $1.00 per period.
521
mance capability. Superiors did not receive any
performance information about their own subor-
dinate. Thus, subordinates knew both the perfor-
mance capability range of past subordinates and
their own performance capability, whereas superi-
ors knew only the performance capability range of
past subordinates.
(8) Participants began the negotiation process.
To control for interpersonal factors, superiors
and subordinates were separated by a room parti-
tion and negotiations were conducted on a negoti-
ation form (rather than face-to-face). Subordinates
wrote their initial proposal on the negotiation
form. The administrator then took the form to
the superior, who wrote a counteroer. An oer
and counteroer constituted one round. An equal
oer and counteroer indicated agreement and
ended the negotiation. If a dyad failed to reach
agreement within four rounds, the superior set
the budget.
(9) Once the budget was set, subordinates com-
pleted a 3-min work session. Afterwards, both
members of a dyad were told the subordinates
performance in the work session. Pay for the per-
iod was calculated and communicated to the
participants.
(10) Participants in the no expectation condi-
tion then completed an exit questionnaire, were
paid, and exited the study. Participants in the
expectation condition returned to step 8 (above)
and completed steps 8 and 9 twice more before
being told time had expired. These participants
then completed the exit questionnaire, were paid,
and exited the study.
Measures
FORECAST is the subordinates estimate made
at the end of the third training session about their
performance capabilities in a 3-min work session.
BID and COUNTER are the subordinates initial
budget proposals and superiors initial counterof-
fers, respectively, made in the negotiations. DIFF
is the dierence between the superiors and subor-
dinates initial negotiation positions, measured as
COUNTER  BID. BUDGET is the nal budget,
and PERFORM is the number of items subordi-
nates correctly decoded in a work session.
522 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
Results
Tests indicate no signicant dierence across
the no expectation and expectation conditions
for any of the following variables for either subor-
dinates or superiors: age, GPA, length of work
experience, gender, or performance capability. In
addition, there is no signicant dierence between
subordinate performance in the third training ses-
sion and FORECAST, suggesting that subordi-
nates believed they had mastered the task by the
end of the third training session.
Tests of the hypotheses reported below are
based on non-parametric statistical tests.11 We
report one-tailed (two-tailed) p-values for direc-
tional (non-directional) hypotheses.
Tests of hypotheses
Expectation of future budget negotiations
Descriptive statistics for all dyads in the expec-
tation and no expectation conditions are reported
in Panel A of Table 1. Hypothesis 1 predicts that
the dierence in superiors and subordinates ini-
tial negotiation positions will be smaller for dyads
that expect future budget negotiations. The med-
ian for DIFF is 10.00 in the expectation condition
versus 18.50 in the no expectation condition.
Results from a MannWhitney test indicate the
dierence between settings is signicant (z = 2.13;
p < 0.02), consistent with H1.
Additional analysis indicates that the signicant
eect is due primarily to subordinates. Subordi-
nates who expect future budget negotiations have
signicantly less extreme median initial negotia-
tion positions (i.e., BID) than do subordinates
who do not expect future negotiations (40.00 ver-
sus 31.00; z = 2.37; p < 0.01). Although the direc-
tion of the dierence in superiors median initial
negotiation positions (i.e., COUNTER) is consis-
tent with superiors who expect future budget nego-
tiations taking less extreme initial positions (48.00
versus 51.00), the dierence is not signicant
(z = 0.66; p < 0.26).
11
We employed non-parametric tests because of their less
restrictive assumptions (Hollander & Wolfe, 1973).
Hypothesis 2 predicts that superiors and subor-
dinates who expect future negotiations are more
likely to reach agreement. In the expectation
condition 47% of the dyads reached agreement,
compared to only 21% in the no expectation con-
dition. A test of proportions (Agresti & Finlay,
1986) indicates a marginally signicant dierence
in these percentages (z = 1.54; p < 0.06), providing
some support for H2.
Hypothesis 3 predicts that when superiors and
subordinates fail to reach agreement, subordinates
who expect future negotiations will under perform
the budget by a smaller amount. Panel C of Table
1 contains descriptive statistics for dyads that
failed to reach agreement. For these dyads, the
median for PERFORM  BUDGET was 3.00
in the expectation condition versus 40.00 in the
no expectation condition. The results of a
MannWhitney test indicate the dierence is sig-
nicant (z = 2.14; p < 0.02).12 Additional analysis
using the Wilcoxon test indicates that subordinates
in the no expectation condition performed signi-
cantly below their budgets (z = 2.05; p < 0.04),
whereas subordinates in the expectation condition
did not (z = 0.56; p < 0.58). These results are con-
sistent with H3.
Hypothesis 4 predicts that when superiors and
subordinates reach agreement, the expectation of
future negotiations will not aect the degree by
which subordinates over perform the budget.
Panel B of Table 1 contains descriptive statistics
for dyads that reached agreement. For these
dyads, the median for PERFORM  BUDGET
was 5.00 in the expectation condition versus 6.00
in the no expectation setting. The results of a
MannWhitney test indicate the dierence is not
signicant (z = 0.69; p < 0.25), consistent with
H4.13
Across all dyads, median subordinate perfor-
mance was higher for subordinates who expected
future budget negotiations (46.00 versus 29.50),
and the dierence is marginally signicant
(z = 1.42; p < 0.08). Consistent with the results
12
A ranked ANCOVA with FORECAST as the covariate
yields a qualitatively similar result.
13
A ranked ANCOVA with FORECAST as the covariate
yields a qualitatively similar result.
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
reported above, this performance eect is due to
subordinates in dyads that failed to reach agree-
ment. An expectation of future budget negotia-
tions not only caused these subordinates to react
to their imposed budgets in a less spiteful manner,
but this expectation also appears to have com-
pletely eliminated subordinates spiteful behavior
as evidenced by the fact that they did not signi-
cantly under perform their budgets.14
Negotiation strategies and outcomes across periods
Descriptive statistics for each period of the
multi-period condition are reported in Table 2.
Hypothesis 5 predicts that superiors and subordi-
nates are more likely to reach agreement in the
current period if they reached agreement in the
preceding period. Of the dyads that reached agree-
ment in period i (i = 1, 2), 81% reached agreement
in period i + 1. In contrast, only 43% of the dyads
that failed to reach agreement in period i reached
agreement in period i + 1. These percentages are
in the predicted direction, and a test of propor-
tions indicates that these percentages are signi-
cantly dierent (z = 2.31; p < 0.01), consistent
with H5.
Hypothesis 6 predicts that the dierence
between superiors and subordinates initial nego-
tiation positions will decrease over time. Of the
15 dyads in the multi-period condition, DIFF
was smaller in period 3 than in period 1 for 12
dyads. This pattern is in the predicted direction,
and a sign test indicates that the pattern is signi-
cant (p < 0.02). The results of a Wilcoxon test indi-
cate that the magnitude of the decrease is also
signicant (z = 2.02; p < 0.03). The median DIFF
decreased from 10.00 in period 1 to 4.00 in period
3. These results are consistent with H6.
14
The performance eects, particularly the fact that perfor-
mance is not signicantly below the budget for subordinates in
dyads that did not reach agreement, are inconsistent with
subordinates curtailing performance in anticipation of superiors
ratcheting (Weitzman, 1980). The lack of a dynamic incentive
eect indicates that either the conditions were not appropriate
for subordinates to curtail their performance (e.g., subordinates
believed the ratchet adjustment factor would be small) or other
factors present in the setting (e.g., incentives to act coopera-
tively) dominated the dynamic incentive eect.
523
Hypothesis 7 predicts that the likelihood of
agreement will increase over time. Of the 15 dyads,
67% reached agreement in period 3 versus only
47% in period 1. These percentages are in the pre-
dicted direction, and a test of proportions indi-
cates that the dierence in these percentages is
marginally signicant (z = 1.34; p < 0.09). These
results provide some support for H7.
Hypothesis 8a predicts that budgets in periods
two and three will reect ratcheting. To test this
hypothesis, we selected each occurrence in period
j  1 (j = 2, 3) where subordinate performance
either exceeded or lagged the budget. We then cre-
ated a new variable called RATCHETj, which is
the change in the budget from period j  1 to per-
iod j, measured as BUDGETj  BUDGET(j1).
Ratcheting implies that RATCHETj should be
positive (negative) when performance was higher
(lower) than the budget in period j  1.
There were 15 occurrences in period j  1 where
subordinate performance exceeded the budget, and
14 occurrences in period j  1 where subordinate
performance lagged the budget, for a total of 29
occurrences. RATCHETj was in the predicted
direction 22 times, in the wrong direction two
times, and zero in ve cases. This pattern is consis-
tent with the pattern predicted in H8a, and a sign
test indicates that the pattern is signicant
(p < 0.01). These results support H8a, and are con-
sistent with superiors engaging in ratcheting.
We also examined the degree of ratcheting for
the 29 occurrences in period j  1 where subordi-
nate performance either exceeded or lagged the
budget. For each occurrence, we calculated two
new variables. The rst, BASEj, measures the mag-
nitude of a 100% ratchet in period j as PER-
FORM(j1)  BUDGET(j1). The second,
DEGREEj, measures the degree of ratcheting in
period j as RATCHETj/BASEj.
Hypothesis 8b predicts that when subordinates
overperformed the budget in period j  1, the bud-
get in period j will not reect full ratcheting. For
the 15 occurrences in period j  1 where subordi-
nate performance exceeded the budget, the median
RATCHET is 3.00 and the median BASE is 8.00.
The results of a Wilcoxon test indicate a signicant
dierence (z = 2.48; p < 0.01). Further, the median
DEGREE is only 0.38, indicating that the budget
524 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
in period j increased by only 38% of the excess in
period j  1 of subordinate performance over the
budget. These results indicate that the budget does
not reect full ratcheting, consistent with H8b.
We did not provide a prediction about the
degree of ratcheting when subordinates underper-
formed the budget in period j  1 due to ambiguity
about the expected eect. For the 14 occurrences
in period j  1 where subordinate performance
lagged the budget, the median RATCHET is
6.50 and the median BASE is 14.50. The results
of a Wilcoxon test indicate a signicant dierence
(z = 2.20; p < 0.02). The median DEGREE is 0.34,
indicating that the budget in period j decreased by
only 34% of the excess in period j  1 of the bud-
get over subordinate performance. Consistent with
the results above, these results indicate that superi-
ors did not engage in full ratcheting.15
Discussion
This paper reports the results of an experiment
designed to determine the eects of temporal inter-
dependencea fundamental aspect of budget nego-
tiations in multi-period settingson budget
negotiation strategies and outcomes. Because an
expectation of future interactions is a necessary con-
dition for temporal interdependence, one issue we
examine is the eect of the presence versus absence
of an expectation of future budget negotiations with
the same individual on current period negotiation
strategies and outcomes. An expectation of future
15
Because the budget is a function of the superiors and
subordinates initial negotiation positions, ratcheting in the
budget suggests that superiors and/or subordinates ratcheted
their initial negotiation positions. Accordingly, we performed
the ratchet analysis for the superiors initial negotiation
position (i.e., COUNTER), now dening RATCHETj as
COUNTERj  COUNTER(j1). The results for COUNTER
mirror the results for BUDGET: RATCHET is in the predicted
direction 22 times, in the wrong direction two times, and zero in
ve cases. For those subordinates whose performance exceeded
the budget, the median RATCHET of 3.00 is signicantly
smaller than the median BASE of 8.00 (z = 2.68, p < 0.01), and
the median DEGREE is 0.33. For those subordinates whose
performance lagged the budget, the median RATCHET of
6.00 is signicantly smaller than median BASE of 14.50
(z = 2.20, p < 0.02), and the median DEGREE is 0.68.
budget negotiations provides incentives for superi-
ors and subordinates to act as if they are concerned
about the others outcomesand thus incentives to
act cooperativelybecause doing so has potential
strategic benets (Pruitt & Carnevale, 1993; Pruitt
& Rubin, 1986; Rubin et al., 1994). Specically, act-
ing cooperatively increases the likelihood of superi-
ors and subordinates developing sustainable
cooperative solutions across future periods, even
though such solutions are not enforceable ex-post
in any given period. Our results are consistent with
an expectation of future negotiations causing supe-
riors and subordinates to act more cooperatively.
Superiors and subordinates who expect future bud-
get negotiations have smaller dierences in their ini-
tial negotiation positions and are more likely to
reach agreement on budgets. Further, subordinates
who expect future budget negotiations have higher
performance, both in absolute terms and relative
to their budgets, than subordinates in a single period
negotiation.
The second issue we examine is the pattern of
negotiation strategies and outcomes across periods
to assess the eect of prior budget negotiations and
outcomes on current period negotiation strategies
and outcomes. Temporal interdependence implies
that individuals can learn from and react to nego-
tiation strategies and outcomes from prior periods.
Our results indicate that in a repeated negotiation
setting, superiors and subordinates react to negoti-
ation strategies and outcomes from prior periods
in predictable ways. Superiors initial negotiation
positions and the budget each reect subordinate
performance in the preceding period, consistent
with superiors using subordinate performance to
update their beliefs about subordinate perfor-
mance capability. Specically, superiors pursue
higher (lower) budgets when subordinate perfor-
mance in the preceding period exceeded (lagged)
the budget. In addition, the likelihood of agree-
ment in a particular period depends on the prior
period. Once a particular superior and subordinate
reach agreement, they are more likely to continue
to reach agreement in future periods. Further,
the dierence between superiors and subordinates
initial negotiation positions decreases across peri-
ods, and the likelihood of negotiation agreement
increases.
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528 525

Table 1
Mean, median, and standard deviation for selected negotiation strategies and outcomes by expectation of future budget negotiations
Panel A: all dyads Panel B: dyads Panel C: dyads
that agreed that did not agree
Expect future Expect future Expect future
negotiations negotiations negotiations
Yesa Noa Yes No Yes No
Number of dyads 15 14 7 3 8 11
FORECASTb 47.27 47.36 48.00 44.67 46.63 48.09
47.00 47.00 48.00 45.00 46.00 48.00
6.11 3.03 5.26 1.53 7.07 2.95
BIDc 36.13 31.21 42.29 39.33 30.75 29.00
40.00 31.00 45.00 40.00 37.50 30.00
12.86 5.77 5.34 2.08 15.33 4.15
COUNTERd 50.33 56.21 47.00 44.33 53.25 59.45
48.00 51.00 45.00 41.00 49.00 54.00
15.87 20.49 10.23 6.66 19.83 21.98
DIFFe 15.00 25.00 6.43 5.00 22.50 30.45
10.00 18.50 8.00 3.00 14.50 25.00
16.30 22.44 4.69 6.24 19.36 22.23
BUDGETf 44.67 47.07 44.86 40.33 44.50 48.91
45.00 43.50 45.00 41.00 43.50 45.00
9.85 14.14 8.07 2.08 8.07 15.55
PERFORMg 43.87 26.79 48.14 48.00 40.13 21.00
46.00 29.50 47.00 48.00 45.00 10.00
10.81 22.30 5.70 2.00 13.10 21.77
PERFORM  BUDGET 0.80 20.29 3.29 7.67 4.38 27.91
1.00 16.50 5.00 6.00 3.00 40.00
15.59 32.83 9.10 3.79 19.60 33.16
Percentage of 47 21 N/A N/A N/A N/A
dyads agreeing
a
The data for the expectation of future budget negotiations condition is from the rst period of the multi-period setting while the
data for the expectation of no future budget negotiations condition is from the single-period setting.
b
FORECAST is the subordinates estimate made at the end of the third training session about their performance capabilities in a
work session.
c
BID is the subordinates initial budget proposal in the negotiation.
d
COUNTER is the superiors initial counteroer in the negotiation.
e
DIFF is the dierence between the superiors and subordinates initial negotiation positions, measured as COUNTER  BID.
f
BUDGET is the nal budget.
g
PERFORM is the number of items subordinates correctly decoded in a work session.

These results have several implications for
research and practice. First, our results highlight
the importance of temporal interdependence, doc-
umenting how it aects negotiation strategies and
outcomes both in the current period and across
periods. An implication is that results from
research that examines single-period budgeting set-
tings (e.g., Fisher et al., 2002; Waller, 1988;
Young, 1985; Young et al., 1993) may not general-
ize to the multi-period setting. For example, we
replicate the nding in Fisher et al. (2002) that
subordinates in single-period settings, where there
is no expectation of future negotiations, act spite-
ful and signicantly under perform the budget
when superiors impose a budget following a failed
negotiation. However, we nd that this result does
526 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528

Table 2 ratchets generally are equal. This symmetrical rat-

Mean, median, and standard deviation for selected negotiation cheting contrasts with Leone and Rock (2002),
strategies and outcomes by period for multi-period setting
who found asymmetrical ratcheting based on an
Period examination of budgeting at one rm. They found
1 2 3 that at their sample rm, upward ratchets were
Number of dyads 15 15 15 more than twice as large as the downward ratchets.
BIDa 36.13 35.87 36.47 This dierence merits further research.
40.00 40.00 38.00 Finally, our results indicate that temporal inter-
12.86 10.51 11.01 dependence has performance benets, particularly
COUNTERb 50.33 48.13 43.13 when superiors impose a budget following a failed
48.00 45.00 42.00 negotiation. Firms might be able to increase the
15.87 11.26 7.61 benets induced by temporal interdependence by
DIFFc 15.00 12.27 6.67 making the interdependence more salient to its
10.00 9.00 4.00 employees. Firms, therefore, may want to empha-
16.30 13.58 7.30 size to their employees the repeated nature of
BUDGETd 44.67 43.93 41.53 many budget settings.
45.00 45.00 42.00 This study has several limitations. First, as with
9.85 8.84 7.74 all laboratory experiments, the results depend on
PERFORMe 43.87 36.73 43.00 the specic experimental task, treatments, and
46.00 43.00 49.00 parameter values used. Second, employment con-
10.81 19.21 16.21 tracts in practice are determined endogenously.
Percentage of dyads agreeing 47 60 67 However, although the contracts we used in this
a
BID is the subordinates initial budget proposal in the study are common in practice, they were set exog-
negotiation. enously. Third, superiors used budgets solely as an
b
COUNTER is the superiors initial counteroer in the input into the subordinates contract; superiors did
negotiation.
c not use budgets for making resource allocations.
DIFF is the dierence between the superiors and subordi-
nates initial negotiation positions, measured as Fourth, to control for a variety of factors, partic-
COUNTER  BID. ipants could only communicate budget proposals
d
BUDGET is the nal budget. via a form. In practice, however, negotiation often
e
PERFORM is the number of items subordinates correctly involves personal interaction between the negotia-
decoded in a work session.
tors and greater information exchange. Finally, in
examining the pattern of negotiation strategies and
not hold when subordinates expect future budget outcomes across periods, we chose to focus on just
negotiations with the superiors. one multi-period setting. Although our setting of
Second, our results for superiors initial negotia- repeated negotiations with the same individuals is
tion positions across periods and the budget levels arguably the most common budget negotiation
across periods are consistent with superiors engag- setting in practice, limiting the study to just this
ing in ratcheting. Although it is not surprising that setting prevented us from providing evidence
superiors engage in ratcheting given the presence of about the relative importance of dierent factors
information asymmetry about subordinates per- potentially present in multi-period settings. These
formance capabilities, we nd that the degree of limitations provide opportunities for additional
ratcheting is low, indicating that the budgets reect research.
only a relatively small portion of the dierence
between the subordinates performance in the pre-
ceding period and the budget, regardless of Acknowledgements
whether subordinate performance in the preceding
period exceeded or lagged the budget. In addition, This paper has beneted from the comments of
the magnitudes of the upward and downward Terry Neal, Robert Ramsay, Steve Salterio, Alan
 J.G. Fisher et al. / Accounting, Organizations and Society 31 (2006) 511528
Webb, participants of the 2002 ABO Research
Conference and workshop participants at the Uni-
versity of Kentucky, University of South Florida,
and University of Waterloo. Indiana University
Kelley School of Business provided nancial
support.
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