Trust as a behavioral mechanism linking incentive schemes to budgetary slack: A laboratory experiment

Abstract

This study examines the role of trust as a behavioral mechanism linking incentive scheme design to budgetary slack. While prior research has shown that incentive schemes influence budgetary slack, most explanations remain grounded in an economic perspective rooted in Agency Theory. This study integrates Agency Theory and Social Exchange Theory to explain how incentive scheme design shapes trust and subsequently influences budgeting behavior. Using a between subjects laboratory experiment, participants were randomly assigned to either a truth-inducing or a slack-inducing incentive scheme and then completed a budgeting task involving private information. Data were analyzed using Analysis of Variance and mediation analysis with the Hayes PROCESS macro. Results show that the truth-inducing incentive scheme significantly increases trust and reduces budgetary slack relative to the slack-inducing scheme. Trust also has a negative effect on budgetary slack and mediates the relationship between incentive scheme design and budgetary slack. These findings extend the behavioral management accounting literature by showing that trust is a behavioral mechanism explaining how incentive scheme design shapes the use of private information in the budgeting process. The results suggest that the effectiveness of management control systems depends not only on aligning economic incentives but also on building trust, so that information asymmetry is more likely to result in honest budget reporting rather than opportunistic behavior.