Asymmetric information and excess budget: the influence of performance-based budgeting on budgetary slack in US states

ABSTRACT This paper examines whether the legislative adoption of performance-based budgeting (PBB) limits budgetary slack. Based on the model of slack-maximizing bureaucracy, we predict that the enactment of PBB laws is likely to shore up the legislature’s ability to control budgetary slack. By providing more information about the production costs of public services to the legislature as budget sponsors, the legislative adoption of PBB can mitigate the information asymmetry between bureaucrats and the legislature, which leads to more effective control of budgetary slack by budget sponsors. In US states, we document that the budgetary slack is reduced after a state legislature legally mandates the use of performance information in the budgetary deliberation. This finding suggests that the legislative adoption of PBB facilitates the budget sponsors’ use of prior-period budgetary slack information to reduce current-period slack, consistent with the notion of PBB as analytic tools for budget sponsors.