BUDGET RATCHETING IN GOVERNMENTAL BUDGETING: AN EMPIRICAL INVESTIGATION
DOI:
https://doi.org/10.28986/jtaken.v6i1.400Keywords:
Budgeting, budget ratcheting, control, analysis of standardized expenditureAbstract
Previous literature has documented various aspects of behavior in the budgeting process. Behavioral problems that are often discussed include budgetary slack and opportunistic behavior that occur due to information asymmetry. However, there is little attention to behavioral problems in previous studies called ratcheting behavior. This study investigates such behavior in a governmental budgeting setting. Besides, this study extends by testing ratchet behavior when local government adopts a well-known budget control mechanism, called analysis on standardized expenditure. To accomplish this purpose, study participants role-played as the budget preparer on a government budgeting task. The experiment used a web-based instrument that involved 51 participants. Results showed that budget preparer engaged in a ratchet behavior when setting their budget. Furthermore, budget ratcheting did not occur when preparer using an analysis of standardized expenditure. However, this situation only remains for one year. In the next year, preparer engaged in a ratchet behavior, at a lower intention. These findings underscore the importance of analysis of standardized expenditure in a government budgeting process environment. As a practical contribution, these findings suggest that using and monitoring for the adoption of analysis on standardized expenditure should be maintained continuously.
References
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Aranda, C., Arellano, J., & Davila, A. (2014). Ratcheting and the role of elative target setting. The Accounting Review, 89(4), 1197-1226. doi: 10.2308/accr-50733
Banker, R. D., Darrough, M. N., Huang, R., & Plehn-Dujowich, J. M. (2013). The relation between CEO compensation and past performance. The Accounting Review, 88(1), 1-30. doi: 10.2308/accr-50274
Black, D. (1958). The theory of committees and elections. Cambridge, U.K.: Cambridge University Press.
Bouwens, J., & Kroos, P. (2011). Target ratcheting and effort reduction. Journal of Accounting and Economics, 51(1), 171-185. doi: 10.1016/j.jacceco.2010.07.002
Bowen, H. (1943). The interpretation of voting in the allocation of economic resources. The Quarterly Journal of Economics, 58(1), 27–48. doi: 10.2307/1885754
Brennan, G., & Buchanan, J. (1977). Towards a tax constitution for Leviathan. Journal of Public Economics, 8(3), 255–273. doi: 10.1016/0047-2727(77)90001-9
Brennan, G., & Buchanan, J. (1978). Tax instruments as constraints on the disposition of public services. Journal of Public Economics, 9(3), 301–318. doi: 10.1016/0047-2727(78)90013-0
Dobell, P., & Ulrich, M. (2002). Parliament’s performance in the budget process: A case study. Policy Matters, 3(5), 1-24. Retrieved from https://irpp.org/research-studies/policy-matters-vol3-no5/
Dye, R. F., & McGuire, T. J. (1997). The effect of property tax limitation measures on local government fiscal behavior. Journal of Public Economics, 66(3), 469-487. doi: 10.1016/S0047-2727(97)00047-9
Freeman, R. J., & Shoulders, C. D. (2003). Governmental and nonprofit accounting–theory and practice (2nd ed.). New Jersey: Prentice Hall.
Freixas, X., Guesnerie, R., & Tirole, J. (1985). Planning under incomplete information and the ratchet effect. The Review of Economic Studies, 52(2), 173-191. doi: 10.2307/2297615
Gerber, E. R., & Lewis, J. B. (2004). Beyond the median: voter preferences, district heterogeneity, and political representation. Journal of Political Economy, 112(6), 1364-1383. doi: 10.1086/424737
Giroux, G., & Shields, D. (1993). Accounting controls and bureaucratic strategies in municipal government. Journal of Accounting and Public Policy, 12(3), 239-262.
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Hobson, J. L., Mellon, M. J., & Stevens, D. E. (2011). Determinants of moral judgment regarding budgetary slack: an experimental examination of pay scheme and personal value. Behavioral Research in Accounting, 23(1), 87-107. doi: 10.2308/bria.2011.23.1.87
Indjejikian, R. J., Matejka M., & Schloetzer J. D. (2014) Target ratcheting and incentives: theory, evidence and new opportunities. The Accounting Review, 89(4), 1259-1267. doi: 10.2308/accr-50745
Kim, D. S., & Yang, J. (2012). Behind the scenes: performance target setting of annual incentive plans (December 7, 2012). AFA 2010 Atlanta Meetings Paper. doi: 10.2139/ssrn.1361814
Law Number 32 of 2004 concerning Local Government (Undang-Undang Republik Indonesia Nomor 32 Tahun 2004 Tentang Pemerintahan Daerah). Retrieved from https://www.dpr.go.id/dokjdih/document/uu/33.pdf
Lee, T. M., & Plummer, E. (2007). Budget adjustment in response to spending variance: evidence of ratcheting of local government expenditures. Journal of Management Accounting Research, 19(1), 137-167. doi: 10.2308/jmar.2007.19.1.137
Leone, A. J., & Rock, S. (2002). Empirical test of budget ratcheting and its effect on managers’ discretionary accrual choices. Journal of Accounting and Economics, 33(1), 43-67. doi: 10.1016/S0165-4101(01)00044-1
McGuire, T. J. (1999). Proposition 13 and its offspring: for good or evil? National Tax Journal, 52, 129–138.
Ministry of Home Affairs Decree Number 29 of 2002 concerning Guidelines For Administration, Responsibility, and Supervision of Local Finances and Procedures for Forming The Local Budget, Implementation of Local Financial Administration and Local Budget Calculation (Keputusan Menteri Dalam Negeri Nomor 29 Tahun 2002 Tentang Pedoman Pengurusan, Pertanggungjawaban dan Pengawasan Keuangan Daerah Serta Tata Cara Penyusunan Anggaran Pendapatan dan Belanja Daerah, Pelaksanaan Tata Usaha Keuangan Daerah dan Penyusunan Perhitungan Anggaran Pendapatan dan Belanja Daerah). Retrieved from https://palembang.bpk.go.id/?p=3297
Ministry of Home Affairs Regulation Number 13 of 2006 concerning Guidelines for Local Government’s Financial Management (as amended by Number 53 of 2007 and Number 21 of 2011) (Peraturan Menteri Dalam Negeri Nomor 13 Tahun 2006 Tentang Pedoman Pengelolaan Keuangan Daerah). Retrieved from http://hukum.unsrat.ac.id/men/permendagri_13_2006.pdf
Rankin, F. W., Schwartz, S. T., & Young, R. A. (2008). The effect of honesty and superior authority on budget proposal. The Accounting Review, 83(4), 1083-1099. doi: 10.2308/accr.2008.83.4.1083
Rubin, I. S. (1993). The politics of public budgeting: getting and spending, borrowing, and balancing (2nd ed). Chatham, NJ: Chatham House Publishers, Inc.
Ungureanu, M., & Iancu, D. (2012). The economic analysis of bureaucracy and government growth. Theoretical and Applied Economics, 29(11), 59-74.
Weitzman, M. L. (1980). The ratchet principle and performance incentives. Bell Journal of Economics, 11(1), 302-308.
Wills, D. T. (1995). Future implication of the reversion level in agenda-setter models. Economics Letters, 49, 435-440.
Ahn, T. S., Choi, Y. S., Hwang, I., & Hyeon, J. (2018). The effect of information asymmetry and participative target setting on target ratcheting and incentives. Public Performance and Management Review, 41(3), 239-469.
Aranda, C., Arellano, J., & Davila, A. (2014). Ratcheting and the role of elative target setting. The Accounting Review, 89(4), 1197-1226. doi: 10.2308/accr-50733
Banker, R. D., Darrough, M. N., Huang, R., & Plehn-Dujowich, J. M. (2013). The relation between CEO compensation and past performance. The Accounting Review, 88(1), 1-30. doi: 10.2308/accr-50274
Black, D. (1958). The theory of committees and elections. Cambridge, U.K.: Cambridge University Press.
Bouwens, J., & Kroos, P. (2011). Target ratcheting and effort reduction. Journal of Accounting and Economics, 51(1), 171-185. doi: 10.1016/j.jacceco.2010.07.002
Bowen, H. (1943). The interpretation of voting in the allocation of economic resources. The Quarterly Journal of Economics, 58(1), 27–48. doi: 10.2307/1885754
Brennan, G., & Buchanan, J. (1977). Towards a tax constitution for Leviathan. Journal of Public Economics, 8(3), 255–273. doi: 10.1016/0047-2727(77)90001-9
Brennan, G., & Buchanan, J. (1978). Tax instruments as constraints on the disposition of public services. Journal of Public Economics, 9(3), 301–318. doi: 10.1016/0047-2727(78)90013-0
Dobell, P., & Ulrich, M. (2002). Parliament’s performance in the budget process: A case study. Policy Matters, 3(5), 1-24. Retrieved from https://irpp.org/research-studies/policy-matters-vol3-no5/
Dye, R. F., & McGuire, T. J. (1997). The effect of property tax limitation measures on local government fiscal behavior. Journal of Public Economics, 66(3), 469-487. doi: 10.1016/S0047-2727(97)00047-9
Freeman, R. J., & Shoulders, C. D. (2003). Governmental and nonprofit accounting–theory and practice (2nd ed.). New Jersey: Prentice Hall.
Freixas, X., Guesnerie, R., & Tirole, J. (1985). Planning under incomplete information and the ratchet effect. The Review of Economic Studies, 52(2), 173-191. doi: 10.2307/2297615
Gerber, E. R., & Lewis, J. B. (2004). Beyond the median: voter preferences, district heterogeneity, and political representation. Journal of Political Economy, 112(6), 1364-1383. doi: 10.1086/424737
Giroux, G., & Shields, D. (1993). Accounting controls and bureaucratic strategies in municipal government. Journal of Accounting and Public Policy, 12(3), 239-262.
Government Regulation Number 58 of 2005 concerning The Local Government Financial Management (Peraturan Pemerintah Republik Indonesia Nomor 58 Tahun 2005 Tentang Pengelolaan Keuangan Daerah). Retrieved from http://www.jdih.kemenkeu.go.id/fullText/2005/58Tahun2005PP.HTM
Hercowitz, Z., & Strawczynsky, M. (2002). Cyclical ratcheting in government spending: evidence form OECD. International Monetary Fund Working Paper, 1-30. Retrieved from https://www.imf.org/external/pubs/ft/wp/2004/wp04202.pdf
Hobson, J. L., Mellon, M. J., & Stevens, D. E. (2011). Determinants of moral judgment regarding budgetary slack: an experimental examination of pay scheme and personal value. Behavioral Research in Accounting, 23(1), 87-107. doi: 10.2308/bria.2011.23.1.87
Indjejikian, R. J., Matejka M., & Schloetzer J. D. (2014) Target ratcheting and incentives: theory, evidence and new opportunities. The Accounting Review, 89(4), 1259-1267. doi: 10.2308/accr-50745
Kim, D. S., & Yang, J. (2012). Behind the scenes: performance target setting of annual incentive plans (December 7, 2012). AFA 2010 Atlanta Meetings Paper. doi: 10.2139/ssrn.1361814
Law Number 32 of 2004 concerning Local Government (Undang-Undang Republik Indonesia Nomor 32 Tahun 2004 Tentang Pemerintahan Daerah). Retrieved from https://www.dpr.go.id/dokjdih/document/uu/33.pdf
Lee, T. M., & Plummer, E. (2007). Budget adjustment in response to spending variance: evidence of ratcheting of local government expenditures. Journal of Management Accounting Research, 19(1), 137-167. doi: 10.2308/jmar.2007.19.1.137
Leone, A. J., & Rock, S. (2002). Empirical test of budget ratcheting and its effect on managers’ discretionary accrual choices. Journal of Accounting and Economics, 33(1), 43-67. doi: 10.1016/S0165-4101(01)00044-1
McGuire, T. J. (1999). Proposition 13 and its offspring: for good or evil? National Tax Journal, 52, 129–138.
Ministry of Home Affairs Decree Number 29 of 2002 concerning Guidelines For Administration, Responsibility, and Supervision of Local Finances and Procedures for Forming The Local Budget, Implementation of Local Financial Administration and Local Budget Calculation (Keputusan Menteri Dalam Negeri Nomor 29 Tahun 2002 Tentang Pedoman Pengurusan, Pertanggungjawaban dan Pengawasan Keuangan Daerah Serta Tata Cara Penyusunan Anggaran Pendapatan dan Belanja Daerah, Pelaksanaan Tata Usaha Keuangan Daerah dan Penyusunan Perhitungan Anggaran Pendapatan dan Belanja Daerah). Retrieved from https://palembang.bpk.go.id/?p=3297
Ministry of Home Affairs Regulation Number 13 of 2006 concerning Guidelines for Local Government’s Financial Management (as amended by Number 53 of 2007 and Number 21 of 2011) (Peraturan Menteri Dalam Negeri Nomor 13 Tahun 2006 Tentang Pedoman Pengelolaan Keuangan Daerah). Retrieved from http://hukum.unsrat.ac.id/men/permendagri_13_2006.pdf
Rankin, F. W., Schwartz, S. T., & Young, R. A. (2008). The effect of honesty and superior authority on budget proposal. The Accounting Review, 83(4), 1083-1099. doi: 10.2308/accr.2008.83.4.1083
Rubin, I. S. (1993). The politics of public budgeting: getting and spending, borrowing, and balancing (2nd ed). Chatham, NJ: Chatham House Publishers, Inc.
Ungureanu, M., & Iancu, D. (2012). The economic analysis of bureaucracy and government growth. Theoretical and Applied Economics, 29(11), 59-74.
Weitzman, M. L. (1980). The ratchet principle and performance incentives. Bell Journal of Economics, 11(1), 302-308.
Wills, D. T. (1995). Future implication of the reversion level in agenda-setter models. Economics Letters, 49, 435-440.
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Submitted
2020-02-20
Accepted
2020-03-27
Published
2020-06-28
How to Cite
Misra, F. (2020). BUDGET RATCHETING IN GOVERNMENTAL BUDGETING: AN EMPIRICAL INVESTIGATION. Jurnal Tata Kelola Dan Akuntabilitas Keuangan Negara, 6(1), 73–86. https://doi.org/10.28986/jtaken.v6i1.400
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