Burn it or Return it? The Effects of the Possibility to Return Budget and the Moderating Role of Uncertainty on Capital Budgeting

This paper uses an experiment to investigate the effects of giving subordinates the possibility to return remaining budget to the organization on capital budgeting processes. We predict and find that when subordinates face no uncertainty when they submit their budget request, the possibility to return budget increases budget requests compared to not having this possibility. Under uncertainty, this effect is mitigated and budget requests no longer increase. We also predict and find that subordinates return more budget under uncertainty than under certainty. Together the results imply that the possibility to return budget increases effective slack consumption (i.e., project inefficiency) under certainty but decreases it under uncertainty. We contribute to the literature by integrating an important feature of budgeting practice into research, i.e., subordinates’ possibility to return remaining budget. Our findings imply that in some situations, adopting a “use it or lose it” budgeting policy may be beneficial for organizations