BEER Lab Meeting - Fidel Petros

Organizations usually award expiring budgets to their units on a yearly basis. In a world with uncertainty about the availability of high-value projects during the year, this mechanism creates incentives for the budget holder to spend the money left at the end of the year, irrespective of the value of the available projects. So far, the possibility of (fully) Roll-over leftovers for the next year have been established to shut down the incentives for wasteful spending at the end of the year. From the side of the principal awarding projects, I show that if the prevalence of high-level projects is sufficiently low, the principal prefers yearly expiring budgets to allow roll-over. I show that allowing budget holders to pool their resources later in the year can lead to higher social welfare than both roll-over and no roll-over. I develop an experiment design to test this theory.