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.