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 , Structurally Induced Equilibrium , Experimental Economics

JEL(s): D71 , H61

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP2661.asp

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.