Budgeting in Public Organizations: The Influence of Managerial and Political Aspects

We study the use of budgets in public organizations with governance shaped by democratic structures. In particular, we examine political variables – electoral cycle, majority government, and ideology – and managerial variables – past performance and peer performance – in the context of city governments. Using data from 170 municipalities over a period of seven years (two electoral cycles), the study documents the simultaneous effect of these two types of variables. We find evidence that budget increases are more pronounced right before and right after elections (political). Furthermore, our findings suggest that ideology affects not only resource allocation decisions but also how municipalities manage the budgeting process; indicating the potential role of ideology in management practices (political). We also find evidence for ratcheting (managerial): the deviation between last period’s actual and budgeted performance is associated with upcoming budgets. However, this effect is symmetric, in contrast to the more common asymmetric structure previously documented in for-profit organizations. Relative target setting (managerial) is also present in public organizations and varies with the relative debt level of the city. The findings of this study are also informative to for-profit organizations as they open up their governance to more democratic structures and begin to experience the competing managerial and political logics in interacting with stakeholders.