DP2661 Budget Processes: Theory and Experimental Evidence

Author(s):	Karl-Martin Ehrhart, Roy J Gardner, Claudia Keser, Jürgen von Hagen
Publication Date:	January 2001
Keyword(s):	Budget Processes, Experimental Economics, Structurally Induced Equilibrium
JEL(s):	D71, H61
Programme Areas:	Public Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2661

This Paper studies budget processes, both theoretically and experimentally. We compare the outcomes of bottom-up and top-down budget processes. It is often presumed that a top-down budget process leads to a smaller overall budget than a bottom-up budget process. We show, using structurally induced equilibrium theory, that this need not be the case. To test the implications for budget processes of structurally induced equilibrium theory, we conduct a series of experiments. The evidence from these experiments supports the predictions of structurally induced equilibrium theory, both at the aggregate and at the individual subject level.