Organizational Identity, Fixed Salary Contracts, and Financial Performance in Local Governments : Theory and Evidence

This study explores the effect of financial managers’ organizational identity (OI) on improving financial performance under fixed salary contracts and balanced budget restrictions in Japanese local governments (LGs). LGs enter compensation contracts based on fixed salaries with financial managers and demonstrate a strict fiscal policy based on balanced budget restrictions. How and under what conditions should OI contribute to improving financial performance in LGs? In the context of financial managers in Japanese LGs, we place organizational identities using the principal (mayor)–agent (financial manager) model under fixed salary contracts and a strict fiscal policy. Our mathematical results reveal that the impact of OI on financial performance in LGs depends on the extent of a strict fiscal policy and the reserve fund. Studying 452 survey responses of financial managers in Japanese LGs, we find evidence consistent with our hypotheses based on the theoretical model. The result contributes to management and government accounting studies by showing that the extent of financial policies and the reserve fund are drivers for OI to work effectively on improving financial performance in governments