In this paper, we examine whether rankings affect the
veracity of individuals’ reports. We employ a participative
budgeting setting similar to Evans et al. (2001) in which
managers (hereafter subordinates) receive private cost
information and then submit a budget request to a
superior. The budget request splits the available surplus between
the subordinate and the superior. Subordinate compensation
is based on the budget request, and the
subordinate has strict financial incentives to request the
highest budget amount. The superior’s residual claim (firm
profit), however, is minimized by this subordinate
strategy. Consistent with Evans et al. (2001), the subordinate
is requested to provide an accurate (honest) budget request.
Increased subordinate budget accuracy (honesty)
results in more surplus being allocated to the firm and less
to the subordinate.