| Abstract: | Activity‐based budgeting is designed to strengthen the link between activity and budgets. If budgets automatically follow fluctuations in demand, uncertainty is reduced for agencies and politicians can focus more on long‐term decisions. Activity‐based budgeting is likely to fail unless activity can be defined and measured with reasonable accuracy. An equally fundamental condition is the credibility of the budgeting rules. This article provides an empirical test of the effect of output‐purchase budgeting based on data over time from public and private schools. Potentially disturbing variables are held constant, allowing for analysis of the interplay of budgeting systems and credible commitment. Output‐purchase budgeting does indeed strengthen the link between activity and budgets, provided that politicians are able to credibly commit themselves to the rules. |
