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

36 Pages Posted: 25 Sep 2007

See all articles by Markus C. Arnold

Markus C. Arnold

University of Bern - Institute for Accounting

Eva Ponick

Clausthal University of Technology

Heike Yasmin Schenk-Mathes

Clausthal University of Technology

Abstract

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.

Keywords: Budgeting, resource allocation, truth-telling, Groves mechanism, profit sharing, communication

JEL Classification: C91, G31, M40, M46, M52

Suggested Citation

Arnold, Markus C. and Ponick, Eva and Schenk-Mathes, Heike Yasmin, Groves Mechanism vs. Profit Sharing for Corporate Budgeting - An Experimental Analysis with Preplay Communication. European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1016671

Markus C. Arnold (Contact Author)

University of Bern - Institute for Accounting ( email )

Engehaldenstr. 4
Bern, 3012
Switzerland

Eva Ponick

Clausthal University of Technology ( email )

Julius-Albert-Str. 2
Clausthal
Germany

Heike Yasmin Schenk-Mathes

Clausthal University of Technology ( email )

Julius-Albert-Str. 2
Clausthal
Germany

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