Thursday, December 09, 2010

How Budgets Distort Spending Behavior

Two economists, Jeffrey Liebman and Neale Mahoney, have written an interesting paper about how budgets affect spending in the federal government. In particular, they hunted for evidence of wasteful expenditures at year end, driven by the "use it or lose it" nature of government budgets. Here is what the Boston Globe reported about their study:

Not only does information technology spending across the federal government jump by a factor of seven in the last week of the fiscal year, but those end-of-year projects are much more likely to earn lower quality scores, based on cost overruns, delays, and management evaluations. The authors recommend allowing the rollover of unused funds.

Businesses and other organizations should be cautious about this same phenomenon. Draining unused budgets at year-end is a universal phenomenon, unless other controls are put in place (including policies such as the rollover of unused funds).

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