The Effect of Endogenous Contract Selection on Budgetary Slack: An Experimental Examination of Trust, Distrust, and Trustworthiness

This study examines the effect of endogenous contract selection on budgetary slack using two slack-inducing contracts found in the literature: a trust contract where the superior must accept any feasible budget submitted by the subordinate and a discretion contract where the superior can accept or reject the budget. We find that both contracts generate less budgetary slack when they are endogenously selected by the superior than when they are...