This paper examines how corporate reliance on budgets is affected by major changes in the economic environment. We combine survey and archival data from the economic crisis that began in 2008. The results indicate that, as a result of the economic crisis, budgeting became more important for...

A fundamental problem of incentive contracting, often referred to as the ratchet effect, is that good performance in one period may be penalized by next-period targets that are more difficult to achieve. Several studies provide evidence that favorable performance relative to target is associated...

Using current performance to set future targets can discourage effort and reduce performance. Our study examines whether this ratchet effect also undermines incentives of high-level managers and executives. We use a dynamic model to show that empirical tests used in prior literature can falsely...