Volume 5 • Issue 6 • 1000218 J Psychol Psychother ISSN: 2161-0487 JPPT, an open access journal Research Article Open Access Mogi and Tamori, J Psychol Psychother 2015, 5:6 DOI: 10.4172/2161-0487.1000218 Research Article Open Access Purchase Patterns affected by Budget Spending Rules Ken Mogi 1 * and Yoshi Tamori 2 1 Sony Computer Science Laboratories, 3-14-13 Higashi-Gotanda, Shinagawa-ku, Tokyo 141-0022, Japan 2 Human Information Systems Laboratory, Kanazawa Institute of Technology, 3-1 Yatsukaho, Hakusan, Ishikawa 924-0838, Japan Abstract The efﬁcient spending of public money is a matter of social concern. In the regulations of many countries, at the end of ﬁscal year, the unused budget “expires” and the remaining money is returned to the treasury, with the budget for the following year possibly reduced. In response, people in their spending capacities tend to use up the remaining budget towards the end of the year, in a “use it or lose it” mentality. Here we reproduce this “end-of-year spending binge” in an experiment, where subjects tend to spend excessively towards the end of ﬁscal year. We show that by modifying the budget rule so that the remaining money is “carried over”, the excessive spending can be signiﬁcantly curbed. Our results suggest that experiments in the laboratory can be used to study people’s budget spending behavior and identify factors that affect wasteful overspending, potentially helping design ﬁnancial rules that encourage effective use of budget. Keywords: Budget; Eﬃciency; Use-it-or-lose it; End-of-year spending binge Introduction In many countries, budget authority requires the agencies to spend funds by the end of the ﬁscal year or return them to the treasury [1]. Under such a regulation, there are two potential losses for the spending agency if some portion of the budget money remains unspent at the end of the ﬁscal year. e spending agency would suﬀer from the missed opportunity to spend the money, regardless of the value of items and services thus purchased. In addition, there is the risk that future budgets will be reduced, based on the judgment that unspent money represents a lack of need [2]. In fact, legislators tend to regard end-of-year surplus as an excuse to cut future budgets [3]. ese circumstances lead to the likelihood that the spending agencies would resort to low-value spending, as the opportunity cost for end-of-ﬁscal year spending is close to zero. Speciﬁcally, it is expected that the agent would spend more amount of money towards the end of the ﬁscal year (“overspending”), while the quality of the items purchased would become lower towards the end of the ﬁscal year (“ineﬃciency”). ere is empirical evidence to suggest that expectations about overspending and ineﬃciency towards the end of ﬁscal year are actually the case. Using data on all U.S. federal contracts from 2004 through 2009, Liebman and Mahoney. “Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement.” National Bureau of Economic Research Working Paper 19481) found that spending spiked in all major federal agencies during the 52nd week of the year, as the agencies rushed to exhaust the expiring budget authority: e spending in the last week of the year was 4.9 times higher than the rest-of-the-year weekly average. ey also found that the average project quality fell at the end of the year. Quality scores in the last week of the year were 2.2 to 5.6 times more likely to be below the central value. us, actual data seems to suggest the existence of both overspending and ineﬃciency. e tendency to overspend at the end of the ﬁscal year serves the short-term interests of the spending agent, as it reduces the amount of money lost from budget expiration. From the viewpoint of community interest (representing the stockholders and taxpayers in the private and public sectors, respectively), wasteful year-end spending undermines eﬃcient money spending. In the context of principal-agent problem *Corresponding author: Ken Mogi, Sony Computer Science Laboratories, Fundamental Research Laboratory, 3-14-13 Higashi-Gotanda, Shinagawa-ku, Tokyo 141-0022, Japan, Tel: +81-90-4751-4466; E-mail: kenmogi@qualia-manifesto.com Received September 09, 2015; Accepted November 04, 2015; Published November 11, 2015 Citation: Mogi K, Tamori Y (2015) Purchase Patterns affected by Budget Spending Rules. J Psychol Psychother 5: 218. doi: 10.4172/2161-0487.1000218 Copyright: © 2015 Mogi K, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. [4,5], the eﬃcient spending of budget is a case where the spenders of budget money (agent) are supposed to be acting in the best interests of taxpayers or stockholders (principal). e problem is that the agent’s actions do not necessarily align with the interests of the principal. e government agency, as the agent, may indulge in a wasteful end- of-year overspending, resulting in a misalignment with the intentions of legislative oﬃcials as the principal [6,7]. It is thus of scientiﬁc and practical interest to understand how the overspending behaviors occur in the face of the possible budget surplus, and if possible, how to curb them. ere are at least three possible causes for the end-of-year overspending. One is the fact that the budget would expire and the spending agent would lose the opportunity to spend it. e second is the potential reduction of the budget in the next ﬁscal year due to the budget surplus. e third cause, uncertainties in the purchase parameters, is indirect but potentially signiﬁcant: Due to the uncertainties in circumstances pertaining to the execution of budget, the spending agent might be motivated to reserve some money towards the end of the ﬁscal year, preparing for “a rainy day”. e extra cash available at the end of the ﬁscal year would then nurture proneness for overspending. In the real world, spending behavior occurs in a complex and opaque environment, where it is oﬅen diﬃcult to identify the factors contributing to the overspending behavior. In addition, it takes at least a few years to evaluate how a change in budget regulations would aﬀect people’s budget spending behavior. It is therefore beneﬁcial to have experiments where the wasteful year-end spending could be reproduced. Here we report a reproduction of the wasteful year-end spending in an experiment. We used sweets available on the Japanese market Journal of Psychology & Psychotherapy J o u r n a l o f P s y c h o l o g y & P s y c h o t h e r a p y ISSN: 2161-0487