Budget ratcheting in museums

How do revenue budget deviations affect the next periods' budgets in non-profit organizations? Niels Sandalgaard and I examine this in our paper “Budget Ratcheting in Museums”, which has been published in the Journal of Public Budgeting, Accounting & Financial Management.
Budget ratcheting in museums

Our overall research question is: How does budget ratcheting differ in museums and for-profit companies? We gained access to financial reporting and budget data from approximately 100 state-subsidized Danish museums from 2015 to 2019 to address this question. In the empirical part, we use median regression estimations to test for ratcheting.

Specifically, we tested for revenue-budget ratcheting, focusing on the asymmetry between organizations achieving their budgeted revenue from admission charges and those failing to achieve the budget. We found that the ratcheting was higher for organizations that failed to reach their budgeted revenue from admission charges. Furthermore, additional analysis indicates that this asymmetric ratcheting might only be significant in museums that are more financially autonomous (measured by the proportion of their revenue from admission charges). 

The results indicate that museums receiving public funding will be reluctant to show a too large increase in budgeted revenue from non-grant revenue. In this way, we demonstrate that budgets function as a signaling instrument towards those allocating grants. From a policy perspective, this also indicates that decisions regarding public funding of museums need to be based on financial performance at a longer time horizon than the individual year.

Read the article here