ISSN 2189-9592

Journal of Japanese Management
Vol. 2, No.1, November 2017

JFMRA
Japan Federation of Management Related
Academies

Editor-in-Chief
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Editors
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Isuke Kohtoh (Japan Academy of Management Philosophy, Chukyo Gakuin University)
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ISSN 2189-9592

Journal of Japanese Management
Vol.2, No.1, November 2017

JFMRA

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Japan Federation of Management Related
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Contents

Duty-free shopping & expenditure behavior of Japanese travelers・・・・・・・・・・ p.1
Akira Saito

Recommended paper by Japan Cost Accounting Association
Consequences of Emphasizing Feasibility during Budget-Making
Process
Fumiyoshi Watanabe

・・・・・・・・・・・・p.20

Journal of Japanese Management Vol.2, No.1, November 2017

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Duty-free shopping & expenditure behavior of Japanese
travelers

Akira Saito

Faculty of Humanities and Social Sciences, Jissen Women’s University, Tokyo, Japan
Japan Society of Industry and Economy
E-mail: saito-akira@jissen.ac.jp

Abstract:
This study examines the shopping behavior of Japanese tourists at international
airports, in particular, the correlation between attitudes toward shopping at airports andexpenditure behavior. Based on quantitative research, three dimensions—hedonic, utilitarian,and luxury are observed as consumer attitudes. Using these three dimensions, this study
undertakes multiple regression analysis of spending on the entire shopping and luxury brandproducts at airports, revealing correlations between, on one hand, the hedonic and luxury
dimensions, and on the other, overall spending on shopping, as well as between luxury
dimensions and expenditure on luxury brands. Since this study focusses on shopping behavior
among Japanese travelers visiting foreign countries, the findings can provide strategic
suggestions for international airport management that targets Japanese travelers in the
future.
Keywords
Airport shopping behavior, hedonic shopping behavior, luxury shopping behavior,expenditure behavior, duty free(1) Introduction
Shopping is considered the oldest andmost important element of tourism. For
many travelers, tourism is not complete
without spending some time at shops,
commercial areas, and local markets(Hudman and Hawkins, 1989; Keown, 1989).
Therefore, as Chung (2015) is
mentioned, the shopping behavior at the
airport, shopping behavior in the street andshopping malls are not necessarily the same,

to understand the shopping behavior at the
airport while traveling, extremely important
for the retail strategy. However, as noted byFreathy and O’Connell (1999) and Geuensa
et al. (2004), there are not enough studies on
travelers’ shopping behavior at airports.
Nevertheless, the travel retail sector of
the luxury brand market (Boston Consulting
Group (BCG), 2014) has been growing
rapidly and drawing attention—the market
size of the global luxury market in 2012 was

1Journal of Japanese Management Vol.2, No.1, November 2017

1.8 trillion dollars and between 2012 and2014, the market grew 13% per year on
average (Reuters, 2012). In terms ofpurchases made in luxury brand travel retail,if we take Louis Vuitton as an example, theamount of money Japanese travelers spend
overseas is said to account for more than 10%
of worldwide sales (Saito, 2008). Therefore, it
is quite plausible that the impact of Japanese
travelers who purchase luxury brandproducts overseas is behind the growth of thetravel retail sector of luxury brands.
Given this context, this study focuseson shopping behavior in the commercial
areas at international airport terminals,
which is a major travel retail distribution
channel.
In particular, the study aims to
explain the effect of Japanese travelers’attitudes toward shopping behavior induty-free shop areas at international airport
terminals (hereafter “duty-free shop area”) at
the time of traveling overseas on overall
shopping in the duty-free shop area as wellas the expenditure behavior in shopping for
luxury brand products.
In addition to academic contributions,
this
study
has
practical
business
implications for the further growth of luxury
brands under the travel retail sector and for
managing the commercial areas at airports
in the future (Graham, 2010). Currently,
airport management is faced with the need tofocus
oncommercial
facilities—or
non-aviation facilities—as much as aviation
facilities owing to such reasons as airport
privatization, pressure to reduce the aviation
system usage fee due to intensifiedcompetition, the introduction of regulations
on airport usage fees, and intensifiedcompetition between hub airports.
There are three major academic

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contributions of this study, as follows. First,
this study contributes to the limited researchon shopping behavior in airport commercial
areas. Second, this study contributes toresearch on the shopping behavior ofJapanese travelers; previous studies on the
shopping behavior of Japanese travelers
have been limited to particular travel
destinations. Third, this study proposes a
new construct, known as the luxury
dimension, as an attitude toward shopping
behavior in airport duty-free shop areas andexamines
its usefulness
throughaquantitative survey.
The rest of this paper is structured asfollows. First, in Section 2, to review previous
studies on travelers’ shopping behavior andconsumption experience as well as studies on
the construct of luxury brands. Section 3
provides an overview of a quantitative
survey conducted among Japanese people
who have traveled overseas and Section 4
develops hypotheses and the verification
procedure. Based on the survey results, inSection 5, to examine the correlation between
the attitude toward shopping behavior in
airport duty-free shopping areas whentraveling overseas and expenditure behavior
for overall shopping and for luxury brandproducts. Finally, to discuss implications forbusiness in Section 6, the conclusion.
(2) Literature review
1. Studies on travelers’ shopping behavior
Studies on the shopping behavior of
travelers can be divided into three major
categories: shopping behavior in thecommercial areas at airports (Crawford andMelewar, 2003; Geuensa et al., 2004),
shopping behavior during in-flight sales(Huang and Kuai, 2006; Doong et al., 2012),
and shopping behavior in travel destinations

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Journal of Japanese Management Vol.2, No.1, November 2017

(Lundberg, 1976; Hudman and Hawkins,
1989; Keown, 1989; Heung and Qu, 1998;
Freathy and O’Connell, 1999; Mak etal.,1999; Rosenbaum and Spears, 2005,
2006a, 2006b; Rosenbaum, 2007; Kim andAgrusa, 2008). This section reviews previous
studies on shopping behavior in thecommercial areas at airports and the
shopping behavior of Japanese people intravel destinations.
Geuensa et al. (2004) conducted aquantitative survey among Belgian travelers
on shopping behavior in airport commercial
areas and showed that there are two types of
shopping
motives—functional
shopping
motive related to airport facilities andexperiential shopping motive related toairport atmosphere—and classified shoppers
at airports into three types. Crawford andMelewar (2003) showed that there is
impulsive shopping behavior related tosituations of psychological stress andrelaxation during the departure process inthe commercial areas of international
airports, and discussed its importance andthe business implications thereof for airport
commercial areas.
Studies on shopping behavior in travel
destinations indicate that the shopping
behavior of Japanese travelers differs fromthat of Westerners and other Asians (Mak etal., 1999; Rosenbaum and Spears, 2005,
2006a,
2006b;
Rosenbaum,2007).
Rosenbaum and Spears (2005) revealed thatJapanese travelers’ per capita budget totravel to Hawaii was 1,416 US dollars while
North American travelers’ per capita budget
was 644 US dollars. Likewise, Kim andAgrusa(2008)
showedthattheentertainment and shopping expenditure ofJapanese people traveling to Hawaii doubled
compared to that of US travelers. In addition,

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Keown (1989) demonstrated that, in terms of
shopping, Japanese travelers spent 30% on
themselves, and 70% on others, of which 25%
was on family, 20% on friends, 15% on
co-workers, and 10% on others. Furthermore,
Rosenbaum(2007)
presented
thedemographic
differencesinJapanesetravelers’ shopping behavior, revealing thatJapanese women primarily purchase luxury
fashion items, such as bags, leather goods,
shoes, and clothing. He further showed thatthe majority of female Japanese travelers
purchase luxury brand products forthemselves while purchasing less expensive
brand products and local mementos assouvenirs for other people.
As mentioned in the introduction,
there is no previous study on shopping
behavior in the commercial areas atinternational airport terminals at the time oftravelingoverseasfocusingonthecharacteristics of Japanese travelers.
Therefore, this study focuses on the shopping
behavior of Japanese travelers in airport
duty-free shop areas at the time of travelingoverseas.
2. Studies on consumption experience
In contrast to consumer behavior
studies with an information-processing
approach that views consumers as taking
rational actions to optimally meet their goals
and objectives, since around 1980, there havebeen increasing discussions on consumer
behavior
studies
based
on
the
experiment-based or interpretation-based
approach, which is centered on hedonic
consumption studies premised on purchasedecisions accompanied by consumption
experience, such as usage and emotions, likejoy.
Holbrook and Hirschman (1982)

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Journal of Japanese Management Vol.2, No.1, November 2017

proposed the 3Fs (fantasy, feeling, and fun)in consumption experience and conducted a
consumer behavior study that emphasized
hedonic consumption and consumption
experience. Hedonic attitudes are based
more on affective gratification derived fromsensory attributes. Utilitarian attitude are
more instrumental and concerned with the
expectations of consequences, are based on
assessment of functional attributes, are moreconcerned with practical usefulness or
benefits. The premise that consumer
attitudes are inherently bidimensional is thebasis for the hedonic and utilitarianconceptualization used by Batra and Ahtola(1991). These two dimensions are related, yet
distinct.
Since then, studies have evolved on
attitude, shopping motives, and shopping
value to fulfil such a hedonic and utilitarian
nature for consumers and, along the way,
measurement scales have been developed(Batra and Ahtola, 1991; Babin et al., 1994;
Spangenberg et al.,1997; Arnold andReynolds, 2003; Voss et al., 2003).
Based on Babin et al. (1994), Arnold
and Reynolds (2003) considered only hedonic
motives behind shopping and categorized
them into six dimensions in an exploratory
manner. Inoue (2007) empirically comparedhedonic motives by retail format (e.g.,
shopping districts at train stations,convenience stores, supermarkets, anddepartment stores) and explored thecorrelation by using the dimensions ofhedonic motives behind shopping in eachtype of retailer as explanatory variables withexpenditure behavior as the dependent
variable.
Meanwhile, as items in a consumer
attitude measurement scale, Spangenberg etal. (1997) presented 24 items, including 12

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for hedonic value and 12 for utilitarian value.
Subsequently, Voss et al. (2003) aggregated
the scale items by Spangenberg et al. (1997),
presented 10 items consisting of 5 items forhedonic scale and 5 items for utilitarian scale,and examined their validity.
In this study, we expand thediscussion by using Spangenberg et al. (1997)
and Voss et al. (2003) as previous studies inthisfield,
adopting
theirattitudemeasurement scale and referring to theresearch framework of Babin et al. (1994),
Arnold and Reynolds (2003), and Inoue(2007).
3. Construct studies on luxury brands
There is no consistent and clear
definition in academia of the term “luxury
brand” (Vickers and Renand, 2003). Phauand Prendergast (2000) defined a luxury
brand as that which has exclusivity andestablished identity along with namerecognition, quality, and strong customer
loyalty. Dubois et al. (2001) regarded luxury
brand items as that which is more thannecessary,beautifulandexpensive
extravagant
goods
with
historicalbackground and uniqueness. Jackson and
Haid (2002) defined a luxury brand as a
status symbol or subject for longing, andsomething that people believe provides
perceived status when owned, making themwant to purchase it even at a premium to thefunctional utility value of the product itself.
Doyle and Stern (2006) and Sicard (2006)
positioned luxury brands as the ultimate
version of product lines under all generalcriteria, such as rarity, high price,functionality, creativity, attention to detail,trend, quality, and imagination.
In this study, we explain the attitude
toward shopping behavior in airport

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duty-free shopping areas by referring to(3) Survey overview
previous studies in this field and adding the
1. Objective of the survey
sense of high quality (High), sense of
we examine the correlation between the
exclusivity (Exclusivity), sense of luxury
attitude toward shopping behavior in airport(Luxury), latest trend (Latest trends), statusduty-free shop areas at the time of traveling(Status), sense of superiority (Superiority)
abroad and the amount of money spent on
and extraordinariness (Unusual) to the
shopping (overall) as well as the amount of
attitude measurement scale items bymoney spent on purchasing luxury brandSpangenberg et al. (1997) and Voss et al.
products compared to street-front stores and(2003).
Table 1. Luxury brands included in the survey (37 Brands)
ArmaniYves Saint-Laurent
Valentino
Van Cleef & Arpels
Etro
Emanuel Ungaro
Emilio Pucci
Hermès
Cartier
Gucci
Christian Louboutin
Chloé
Salvatore Ferragamo
Givenchy
ChanelChopard
Giorgio Armani
Jil Sander
Stella McCartney

CélineChristian Dior
Tiffany & Co.
Tod’s
Tom Ford
Dolce & Gabbana
Burberry
Bally
Harry Winston
Hugo Boss
FENDI
Prada
Bvlgari
Bottega Veneta
MissoniMonclerLouis Vuitton
Loewedepartment stores.
The luxury brands included in thissurvey are the 37 brands1 shown in Table 1.

They are designated in four categories,
namely, “clothing and accessories,” “jewelry
andwatches,”“leather
products,”
and“cosmetics and perfumes,” based on the
categorization by Okonkwo (2009)

The 37 brands included are thosementioned at the time of a preliminary
survey, which was conducted for the purposeof extracting respondents for this study, andare luxury brands respondents purchased ina duty-free shop area at an international
airport. The response results are as shown inAppendix Table 1.
1

2. Overview of the survey method
The survey took place in the field from
June 5–9, 2014. It was conducted by themethod of two-phase online survey. As apreliminary survey, individuals who had

5Journal of Japanese Management Vol.2, No.1, November 2017

boarded an international flight 2 andpurchased a luxury brand product in an
airport duty-free shop area in the past 3
years were extracted from a sample of 6,925
consumer panel members registered at thesurvey company. Ultimately, 442 samples
were obtained as survey subjects after
excluding the samples that answered thesame answer to all the questions or the
samples with extremely short response time.
The sample configuration is as follows: male
= 57.7%, female = 42.3%; those in their teens= 0.2%, 20s = 8.4%, 30s = 19.7%, 40s = 25.3%,
50s = 23.3%, 60s or older = 23.1%; reason for
travel being business = 18%, sightseeing =77%, and private = 5% (e.g., visiting relatives
and acquaintances).
From these samples, we used a 7-point
measurement scale to obtain responses toquestions on attitude toward shopping
behavior in airport duty-free shop areas,
shopping expenditure in the same areas, andshopping expenditure on luxury brandproducts.

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Hypothesis 1: The hedonic nature of
the attitude toward shopping behavior in
airport duty-free shop areas has a positiveeffect on overall shopping expenditure
behavior in airport duty-free shop areas.
Consumers tend to prefer brands thatare akin to their own self-concept and thesame can be said about the attitude toward
shopping behavior, which is part of own
self-concept. Therefore, based on studies ofthe luxury brand construct (Phau andPrendergast, 2000; Dubois et al., 2001;
Jackson and Haid, 2002; Vickers and Renand,
2003; Doyle and Stern, 2006; Sicard, 2006), I
assume there is a correlation between luxury
and shopping expenditure and establish thefollowing two hypotheses.
Hypothesis 2: The luxury nature of theattitude toward shopping behavior in airport
duty-free shop areas has a positive effect on
the overall shopping expenditure behavior in
airport duty-free shop areas.
Hypothesis 3: The luxury nature of theattitude toward shopping behavior in airport
duty-free shop areas has a positive effect on
expenditure behavior for luxury brandproducts in airport duty-free shop areas.
I create models to test the hypotheses,
as shown in Figure 1. Test Model A is used totest Hypotheses 1 and 2 and Test Model B isused to test Hypothesis 3.

(4) Hypotheses and verification procedure
1. Establishing hypotheses
Next, considering the analyses ofprevious studies, we propose survey
hypotheses. It seems that a correlation
between hedonic motives behind shoppingand shopping expenditure, as shown by
Inoue (2007) based on Arnold and Reynolds(2003) and Babin et al. (1994), has a similareffect on shopping expenditure behavior in
the commercial areas at international
airports’ international terminals. Therefore, Iestablish the following hypothesis.

2. Procedure to test hypotheses
As a preparation for testing thesehypotheses, I first take into account previous
studies on the construct of luxury brands
based on Voss et al. (2003). Then, we specify
items to measure attitude toward shopping
behavior in airport duty-free shop areas (atotal of 21 items, including 7 items each forthe hedonic nature and utilitarian nature
based on Spangenberg et al. (1997) and Voss

The routes used by the respondents of thisstudy are as shown in Appendix Table 2.
Note that when there is more than one route,the response is based on the last route used.
2

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Figure 1. Models to test the hypotheses
Source: Compiled by author.
et al. (2003) and 7 items related to the luxury
nature newly presented in this study).
Next, we conduct a quantitative
survey by using a 7-point scale in which 1 =“Not at all applicable,” 2 = “Not applicable,” 3= “Somewhat not applicable,” 4 = “Neither,” 5= “Somewhat applicable,” 6 = “Applicable,”and 7 = “Quite applicable.” Then, we perform
an exploratory factor analysis on the survey
results.
Thereafter, in order to use theextracted factors as explanatory variables
and examine their correlation with shopping
expenditure behavior, we take two types of
shopping expenditure behavior in airport
duty-free shop areas as dependent variables
and conduct multiple regression analysis toexplain each correlation. The two types of
shopping expenditure behavior are from
responses obtained on the 7-point scale for(1) overall shopping expenditure behavior,that is, “the amount of money spent on
shopping in airport duty-free shop areas(after going through the departure or arrival
process) is higher than usual shopping at the
tourist destination.,” and (2) the shopping

expenditure on luxury brand products, thatis, “the amount of money spent onpurchasing luxury brand products per
shopping trip is higher in airport duty-free
shop areas (after going through thedeparture or arrival process) than at a
department store or street-front store of the
tourist destination.”.
(5) Analysis results
1. Factor analysis on attitude toward
shopping behavior in airport duty-freeFirst, we performed a factor analysis
with promax rotation by using the maximum
likelihood method to extract factors from the
7-point scale responses to the 21 items on theattitude toward shopping behavior in the
airport duty-free-shop area, which yielded
the pattern matrix shown in Table 2. Afterexcluding two items3with insufficient factor
loading, we ultimately extracted a 19-item 3-“Amusing” (0.179) and “Unusual” (0.393)
were excluded as items with insufficient
factor loading.
3

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Table 2. Factor analysis on the attitude toward shopping behavior in the airport duty-free shop
area
Variable
UsefulPractical
Necessary
Functional
HelpfulEfficient
Effective
Exciting
Delightful
FunThrilling
Enjoyable
CheerfulHigh
Exclusivity
LuxuryLatest trends
StatusSuperiority
Factor 1 (Utilitarian)
Factor 2 (Luxury)
Factor 3 (Hedonic)
Cronbach’s α coefficient
Contribution (%)
Cumulative contribution (%)

Factor 1(Utilitarian)
0.71900.77520.73800.83670.88330.75910.6685-0.01820.17890.19810.07870.12450.0221-0.0101-0.0168-0.02480.26890.0482-0.0229
Factor Correlation－
0.52190.6162
Internal Consistency
0.9306
Contribution
52.65
52.65

factor structure4, as shown in Table 2 basedontheinterpretabilityofdecaying
eigenvalues (11.4070, 2.2054, 1.2754, 0.9932,
0.5435, 0.4823, etc.) and factors.
The first factor, which is composed ofseven items related to utilitarian nature, wasFactor 2(Luxury)0.0205-0.0959
0.00400.1398-0.0072
0.01050.10970.20650.1241
0.0966
0.26600.04270.1777
0.6661
0.78380.83000.64870.91260.8082

Factor 3(Hedonic)
0.05280.08200.0755-0.1260
0.02180.08040.15060.70690.67810.61960.45400.72710.70830.26450.18290.1399-0.0181-0.07020.01480.5219－0.64790.61620.6479－0.94120.9078

8.99
61.64

3.46
65.10

named the “utilitarian factor.” The second
factor, composed of six items related to thesense of luxury and superiority, was named
the “luxury factor.” The third factor,
composed of six items related to the hedonic
nature, was named the “hedonic factor.”
Cronbach’s α coefficient was calculated
for each factor based on the results of theabove factor analysis to examine internal

The correlation matrix for the items(variables) is as shown in Appendix Table 5.
48

Journal of Japanese Management Vol.2, No.1, November 2017consistency; each factor turned out to be
sufficient, as follows: the first factor’s α =0.9306, the second factor’s 0.9412, and thethird factor’s α = 0.9078.

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behavior in the airport duty-free shop area
as explanatory variables and performed a
multiple regression analysis. The results
are shown in Table 3 below. The second
factor, Luxury Nature (partial regression
coefficient = 0.305, p < 0.01), and the third
factor, Hedonic Nature (partial regression
coefficient = 0.221, p < 0.05), turned out tobe significant (degree of freedom-adjusted
coefficient of determination = 0.415).
Based on these results, we verified
that shopping expenditure behavior in
airport duty-free shop areas and attitude
toward shopping behavior in airport
duty-free shop areas have a significant
correlation with both the hedonic factor
and the luxury factor.

2. Multiple regression analysis using
shopping
expenditureinairportduty-free as the dependent variable(Hypotheses 1 and 2)
The dependent variable is shopping
expenditure behavior in the airport
duty-free shop area, which is based on the
results of the responses to the question ofwhether the amount of money spent on
shopping in the airport duty-free shop area
is higher than usual shopping. We took
three factors extracted from the factor
analysis on the attitude toward shopping

Table 3. Multiple regression analysis using shopping expenditure in the airport duty-free shop
area as the dependent variable (n = 442)
Partial Regression
Coefficient
Factor 1 (Utilitarian )0.1310
Factor 2 (Luxury )0.3055
Factor 3 (Hedonic )0.2211
Constant term
4.6222
Note: Adjusted R: 0.415; *ｐ<0.05 ** ｐ<0.01)
Variable

The analysis results on thiscorrelation are as shown in Figure 2. The
partial regression coefficient for the paththat goes from Hedonic Nature to theoverall amount of money spent on shoppingin airport duty-free shop areas was 0.221
and statistically significant at the 5% levelin Test Model A. Likewise, the partial
regression coefficient for the path that goesfrom Luxury Nature to the overall amountof money spent on shopping in airport
duty-free shop areas was 0.305 andstatistically significant at the 1% level.

Standard
Error
0.08150.08550.0976
0.0577

P-ValueSignificance0.10880.00040.02400.0000*****

Therefore, Hypotheses 1 and 2 were
empirically supported.
3. Multiple regression analysis using
shopping expenditure on luxury brandproducts in airport duty-free as thedependent variable (Hypotheses 3)
Next, we used as the dependent
variable expenditure behavior on shopping
for luxury brand products in airport
duty-free shop areas, which is based on the
results of the responses to the question ofwhether the amount of money spent on
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Figure 2. Analysis results on Test Model A
Source: Compiled by author.
purchasing luxury brand products per
shopping trip is higher in the airport
duty-free shop than when purchasing themat a department store or street-front store.
Then, we performed a multiple regression
analysis with three factors extracted fromthe factor analysis on the attitude toward
shopping behavior in airport duty-free shop
areas as explanatory variables.
The results are shown in Table 4
below. Only the second factor, Luxury
Nature (partial regression coefficient =0.298, p < 0.01), turned out to be significant(degree of freedom-adjusted coefficient ofdetermination = 0.286). Based on theseresults, we verified there is a significant
correlation between expenditure behavior
in shopping for luxury brand products in
airport duty-free shop areas and the luxury
nature in the attitude toward shopping
behavior in airport duty-free shop areas.
The analysis results on this correlation are
shown in Figure 3.
The partial regression coefficient forthe path that goes from Luxury Nature to
the amount of money spent on shopping for
luxury brand products in airport duty-free
shop areas was 0.298 and statisticallysignificant at the 1% level in Test Model B.
Therefore, Hypothesis 3 was empirically10

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Table 4. Multiple regression analysis using shopping expenditure on luxury brand products inthe airport duty-free shop area as the dependent variable (n = 442)
Variable

Partial Regression
Coefficient

Factor 1
0.1525(Utilitarian)
Factor 2 (Luxury)
0.2983
Factor 3 (Hedonic)
0.0316
Constant term
4.3009Note: Adjusted R: 0.286; ** ｐ<0.01)

Standard
Error

P-Value

0.0901

0.0912

0.09450.10790.06370.00170.76970.0000Figure 3. Analysis results on Test Model B
Source: Compiled by author.
supported.

(6) Conclusion
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Significance****Journal of Japanese Management Vol.2, No.1, November 2017

This study examined the correlation
between Japanese travelers’ attitudes
toward shopping behavior in airport
duty-free shop areas—the commercial
areas of international airports—at the timeof traveling overseas and overall shopping
behavior in airport duty-free shop areas, aswell as expenditure behavior for luxury
brand shopping.
We were able to achieve the objectiveof the study and confirmed that thehedonic nature and luxury nature in
attitudes toward shopping in airport
duty-free shop areas have positive effects
on overall expenditure behavior in theseareas (Hypotheses 1 and 2); we also
confirmed that the luxury nature in
attitudes toward shopping in airport
duty-free shop areas has a positive effecton expenditure behavior for luxury brandshopping (Hypothesis 3).
Next, we discuss the implications ofthese academic contributions from abusiness perspective. Based on theanalysis results observed in this study, we
present the business implications from two
perspectives.
First, this study confirmed the effectof the luxury nature, composed of the senseof high quality, exclusivity, status, andsuperiority, on the overall amount of money
spent on shopping in airport duty-free shop
areas. From this, I was able to demonstratethat as airport management is faced with
the need to focus on commercial facilities,
or non-aviation facilities, under anincreasingly
difficultcompetitiveenvironment, it would be effective tostrengthen travelers’ attitudes in relation
to the luxury nature of airport commercial
areas.
Second, the study confirmed that

ISSN 2189-9592

commercial areas at international airport
terminals
areeffective
distribution
channels for luxury brand companies. This
result suggests it would be effective forluxury brand companies (Nagasawa andFukunaga, 2012) whose distribution
policies are limited to stores, such as
corporate stores and department stores
where it is traditionally easy to manage
brand image, to utilize commercial areas atinternational airport terminals as well.
Finally, we briefly describe thelimitations and challenges of this study.
First, the discussion is based on the resultsof a survey among Japanese travelers. As
shown in previous studies, the shopping
behavior of Japanese travelers differs fromthat of western and other Asian travelers.
Therefore, it is probably necessary toundertake an international comparison
with western and Asian travelers before
generalizing the results. In addition to theabove, also with respect to considerationsof gender and age, these are left for the
future research.
Second, it is necessary to consider
the effect of variables, such as
international routes and use of discountairlines (i.e., low-cost carriers) on therelationship between variables reviewed inthis study, including the utilitarian,hedonic, and luxury dimensions, and theprice variable for duty-free purchases,
differences by the airport being used as apurchase location, as well as the impact of
duty-free shops in a city. We leave these as
future research tasks.
Third, in this study, the subjects are
only samples who purchased a luxury
brand product in an international airport
duty-free shop area. Therefore, the subjects
who have not bought the luxury brand

12

Journal of Japanese Management Vol.2, No.1, November 2017

products at an international airport
duty-free shop area but bought them atstreet-front stores or department stores are
excluded This leads to some bias. In thisregard, it must be considered as alimitation of this study.
Fourth, this study examined therelationship with perceived expenditure.
So verification has not been performed
with respect to the relationship with theactual spending, it will be researchchallenges of the future.
Furthermore, since this study islimited to the shopping behavior ofJapanese travelers in duty-free shop areasat international airport terminals whentraveling, another limitation is that thisstudy does not consider the relationship ofshopping in duty-free shop areas atinternational airport terminals in Japan,such as those at Haneda, Narita, Kansai,
and Chubu, to the attitude that foreigners
visiting Japan have toward shopping. We
believe that discussing the relationshipbetween attitude toward shopping at
international airport terminals in Japanand shopping behavior among foreigners
visiting Japan would provide suggestions
about the source of competitive advantage
forJapan’sinternational
airportmanagement in the future.
At the end, with respect to statisticalanalysis, there is a limitation to this study.
In this study, first, exploratory factor
analysis (EFA) was performed, after which,multipleregression
analysiswasperformed. As the results of EFA, factor
correlations are high as shown in Table 2.
From these perspectives, it may beappropriate to SEM is performed. Suchstatistical analysis limits are also
challenges left in the future.

ISSN 2189-9592

Acknowledgments
The author would like to express thesincere thanks to the anonymous reviewers
for careful reading and helpful comments,
in addition, express the gratitude for thevarious academic supports to thepresidents of Japan Society of Industry andEconomy as well as to the directors.
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Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

Appendix
Appendix Table 1. Brands Purchased in the Airport Duty-Free Shop Area (n = 442, MA)
Brand names
ArmaniYves Saint-Laurent
Valentino
Van Cleef & Arpels
Etro
Emanuel Ungaro
Emilio Pucci
Hermès
Cartier
Gucci
Christian Louboutin
Chloé
Salvatore
Ferragamo
Givenchy
ChanelChopard
Giorgio Armani
Jil Sander
Stella McCartney

Count
33
54
23
10
18
8
9
85
41
78
5
24
29

%
7.5
12.2
5.2
2.3
4.1
1.8
2.0
19.2
9.3
17.6
1.1
5.4
6.6

Brand names
CélineChristian Dior
Tiffany & Co.
Tod’s
Tom Ford
Dolce & Gabbana
Burberry
Bally
Harry Winston
Hugo Boss
FENDI
Prada
Bvlgari

Count
32
99
39
14
5
19
65
21
3
14
25
47
55

%
7.2
22.4
8.8
3.2
1.1
4.3
14.7
4.8
0.7
3.2
5.7
10.6
12.4

25
129
8
11
7
5

5.7
29.2
1.8
2.5
1.6
1.1

Bottega Veneta
MissoniMonclerLouis Vuitton
Loewe

9
5
7
65
23

2.0
1.1
1.6
14.7
5.2

Appendix Table 2. Routes Used (n = 442, SA)
Count

%

1

Asia

220

49.8

2

Middle East

5

1.1

3

Russia0

0.0

4Europe

95

21.5

5

Africa3

0.7

6North America

74

16.7

7

South America

9

2.0

8

Other Region

36

8.1

16

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

Appendix Table 3. Simple Tabulation (n = 442)
When youconsidershopping in the
airport duty-free
Questionshop area,
please choose
one of thefollowing items.

1

Useful2

Practical

3

Necessary

4

Functional5

Helpful6

Efficient

7

Effective

8

Exciting

9

Delightful

10

Fun

11

Thrilling

12

Enjoyable

13

Amusing

14

Cheerful

15

High

16

exclusivity

17

Luxury18

Latest trends

19

Status20

superiority

21

unusualQuestionA

Question

B

Over all

Not at all
Notapplicable applicable

Somewhat
notapplicable

Neither

Somewhat
Quite
Applicableapplicable
Applicable

%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count
%
count

100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442
100
442

0.7
3
0.7
3
1.1
5
0.9
4
0.7
3
0.7
3
0.9
4
1.8
8
0.7
3
0.7
3
4.1
18
0.5
2
6.1
27
1.6
7
0.5
2
1.1
5
0.9
4
0.9
4
2
9
2.9
13
1.8
8

2.5
11
2.5
11
2.9
13
1.1
5
2.3
10
2.5
11
2.3
10
4.8
21
2.5
11
3.2
14
6.6
29
2.7
12
11.1
49
3.8
17
3.2
14
3.4
15
2.9
13
3.6
16
4.3
19
5.2
23
2.9
13

3.8
17
8.1
36
9
40
9
40
4.1
18
5
22
7.7
34
11.8
52
7
31
8.8
39
20.1
89
7.5
33
19.7
87
10.4
46
7.5
33
9.3
41
8.8
39
8.8
39
9.3
41
9.5
42
6.3
28

19.7
87
37.6
166
30.3
134
42.8
189
31.2
138
35.1
155
41.9
185
35.7
158
35.1
155
35.5
157
46.4
205
25.1
111
46.6
206
33.3
147
28.5
126
32.6
144
31.4
139
39.1
173
41.2
182
48
212
29.6
131

42.5
188
33.9
150
31.9
141
30.3
134
40.3
178
33.5
148
29
128
26.5
117
33.9
150
31.7
140
14.9
66
38.9
172
10.4
46
30.8
136
33.7
149
30.1
133
32.4
143
30.3
134
25.3
112
18.8
83
34.4
152

26.2
116
15.4
68
18.1
80
12.9
57
17.4
77
19.5
86
15.2
67
15.6
69
16.7
74
17
75
6.3
28
19.2
85
4.8
21
14.9
66
21.5
95
17.2
76
19
84
14
62
14.3
63
12
53
17.6
78

4.5
20
1.8
8
6.6
29
2.9
13
4.1
18
3.8
17
3.2
14
3.8
17
4.1
18
3.2
14
1.6
7
6.1
27
1.4
6
5.2
23
5.2
23
6.3
28
4.5
20
3.2
14
3.6
16
3.6
16
7.2
32

%

100

1.6

7

9.5

21.7

36.4

17.2

6.6

count

442

7

31

42

96

161

76

29

%

100

3.2

9.7

11.8

28.1

27.4

16.3

3.6

count

442

14

43

52

124

121

72

16

Question A: The amount of money spent in the airport duty-free shop area is higher than that spent inusual shopping at the tourist destination.
Question B: In terms of purchasing luxury brand products, the amount of money spent per shopping trip
is higher when purchasing in the airport duty-free shop area than when purchasing at a department
store or street-front store of the tourist destination.

17

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

Appendix Table 4. Descriptive Statistics (n = 442)
When you consider
shopping in the
airport duty-free
Question shop area, pleasechoose one of thefollowing items.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

UsefulPractical
Necessary
Functional
HelpfulEfficient
Effective
Exciting
Delightful
FunThrilling
Enjoyable
Amusing
CheerfulHigh
Exclusivity
LuxuryLatest trends
StatusSuperiority
UnusualQuestion A
Question B

Measurement
Scale

1 = Not at all applicable, 2 = Not applicable, 3 = Somewhat notapplicable, 4 = Neither, 5 = Somewhat applicable, 6 = Applicable,
7 = Quite applicable(7-point scale)n
Mean
Unbiased variance Standard Deviation
442
4.977
1.129
1.062
442
4.55
1.06
1.03
442
4.695
1.464
1.21
442
4.509
1.044
1.022
442
4.767
1.073
1.036
442
4.719
1.155
1.075
442
4.538
1.143
1.069
442
4.425
1.528
1.236
442
4.656
1.179
1.086
442
4.579
1.224
1.106
442
3.869
1.361
1.167
442
4.814
1.272
1.128
442
3.638
1.479
1.216
442
4.534
1.492
1.221
442
4.771
1.315
1.147
442
4.64
1.483
1.218
442
4.665
1.339
1.157
442
4.491
1.226
1.107
442
4.407
1.435
1.198
442
4.249
1.503
1.226
442
4.738
1.505
1.227
Measurement of the dependent variables
442
4.622
1.778
1.333
442
4.301
1.957
1.399

Minimum Maximum
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
7
1
1

7
7

Question A: The amount of money spent in the airport duty-free shop area is higher than that spent inusual shopping at the tourist destination.
Question B: In terms of purchasing luxury brand products, the amount of money spent per shopping trip
is higher when purchasing in the airport duty-free shop area than when purchasing at a department
store or street-front store of the tourist destination.

18

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592(Received: July 25, 2017)(Accepted: October 17, 2017)19

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

Consequences of Emphasizing Feasibility during Budget-Making
Process*
Fumiyoshi Watanabe

Faculty of Business Administration, Tokyo Keizai University
Japan Cost Accounting Association E-mail: watafumi@tku.ac.jp
Abstract
Whether favorable or unfavorable, budget variance, that is, the difference between budgeted performance and actual performance, may result in the inefficient use of resources withina firm. When an organizational unit within a firm incurs a favorable variance, this may seem tobe a beneficial situation at the micro-level; however, the firm allocates the unit additional resources that could have been allocated to other units. Alternatively, when a unit incurs an unfavorable variance, the unit likely has idle capacity that does not create value but rather involves
wasteful costs. Accordingly, when budget variance occurs, firms face the risk of incurring somekinds of losses. This paper demonstrates that when an owner asks a manager to prepare feasible
budgets for avoiding losses due to budget variance, the owner must decrease both the ceilings
for the bonus paid to, and target set for the manager.
Keywords
budgeting, budgetary slack, bonus cap, cost of difference, moral hazard(1) Introduction

then turned into precise drafts through budget

This paper shows that budgets are set

negotiations. This paper models such a budget-loosely when owners require that managers pre-making process, in which budget guidelines arepare feasible budgets by adopting a principal-

viewed as representing the distribution of ex-

agent model. Also, this paper notes that owners

pected profit and managers make effort to nar-

do not pay bonuses to a manager if his or her

row the distribution.1

performance far exceeds expected targets even

Ito (2013) notes that to improve businessthough the performance is measured on the ba-

ability, top management should ask every mem-sis of budget attainment level.

ber of an organization their mission and the way

In many firms, owners communicate

to accomplish it during the planning phase.

budget guidelines to managers and budget

Building upon this idea, this paper shows thatdrafts are authorized after budget negotiations.

an authorized budget is set loosely if an owner

Budget guidelines are just rough plans that areemphasizes the key point stated in Ito (2013).

*I thank two anonymous referees as well as the workshop
participants at the 41st JCAA Annual Meeting and Tokyo
Keizai University. I also thank the financial supports fromJCAA and Tokyo Keizai University.

1 This paper refers to Chen et al. (2010) for modeling sucha budget-making process.

20

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

This result parallels Ozawa (2010), which notes

strategy, as it can reduce losses that are in-that a budget is set below the expected value ofcurred from differences between budgeted per-performance if inter-departmental coordination

formance and actual performance. For example,

is emphasized. However, this paper shows thaton the one hand, Sharp Corporation reported

a budget is set loosely when inter-departmental

heavy losses in 2011 due to unused capacity atcoordination is not considered, and the budget is

its Sakai factory. Utilization of capacity at thisnot set below the expected value of performance.

factory, which was launched in 2009 and is one

Although this paper considers participa-of the world’s largest factories, fell to aroundtive budgeting, the focus of this paper is differ-

30% in the April-June quarter of 2011 (Nikkei

ent from other related agency studies (e.g.,

Sangyo Shimbun, August 3, 2012). Since actual

Heinle et al., 2014). In their models, an agent

volume did not attain planned volume despite

privately observes a signal and then he reports

having set an aggressive target, the firms in-

it to a principal. Since the agent has an incen-

curred losses because some of employees and fa-tive to make a false report, these previous stud-

cilities were idle. On the other hand, Suntory

ies need incentive compatibility constraints to

Beverage and Foods temporarily halted opera-

avoid such a false report. In contrast, this paper

tions since demand for a certain beverage out-

analyzes the setting that an owner communi-

stripped its supply and Suntory had to modify

cates budget guidelines and a manager makes

its production schedule to ensure a steady sup-effort to prepare feasible budgets during aply (Nikkei MJ, April 22, 2015). In this case,budget-making process, in which the manager

since the actual volume overwhelmed thehas no incentive to make a false report.

planned amount despite conservative target

Rather, this paper is a moral hazard

setting, the firm incurred an opportunity loss

model since the manager makes effort to pre-because some of employees and facilities werepare a feasible budget. In this regard, this paper

idle until it acquired enough resources to deliver

parallels Balakrishnan (1991, 1992) anda steady supply.

Demski and Sappington (1987). These studies

In summary, regardless of whether it isanalyze the setting that an agent has an oppor-

favorable or unfavorable, budget variance in-tunity to acquire information to increase thecreases the risk for losses due to idle capacity. To

probability of high performance before opera-

avoid such losses, firms should prepare feasible

tions, and the incentive that a principal gives anbudgets, even though doing so decreases theagent to acquire such information. However, inpossibility of high performance. For example,

the setting of this paper, when a manager

Subaru, whose car sales in the United States

makes effort to prepare a feasible budget, thehas been strong, decided to increase its manu-

probability of high performance is decreased be-

facturing capacity with careful attention to an

cause the distribution of expected profit is nar-oversupply

rowed.

[http://toyokeizai.net/articles/-/69095], May 10,

While the preparation of feasible budgets(Toyo

Keizai

Online2015). In this case, preparing a feasible budget

reduces the likelihood of high performance, it

led to robust performance.

may still be beneficial to firms to pursue such a

In addition, in many firms, some portion
21

Journal of Japanese Management Vol.2, No.1, November 2017of bonuses to managers are based on their

ISSN 2189-9592

owner.

budget achievement. When budgets are formu-

Before the budget-making process, thelated in the way noted above, managers haveowner communicates budget guidelines to theless opportunity to receive bonuses and they do

profit centers. Budget guidelines typically pro-

not necessarily narrow the distribution. To en-vide only general direction, and this paper

courage managers to do so, firms must adopt abonus cap, placing a ceiling on bonuses to man-chooses to use the distribution of an expected
profit, 𝑥~U[𝑚 − 𝑑𝑝 , 𝑚 + 𝑑𝑝 ], as the main prin-agers whose performance far exceeds theirciples in these budget guidelines. This means

budget.

that although the owner sets a mean target

The remainder of this paper is organized
as follows. Section 2 explains the model of thisprofit 𝑚, the guideline has a range from 𝑚 −𝑑𝑝 to 𝑚 + 𝑑𝑝 based on a set of past profits.

paper. Section 3 shows the results of both sym-Also, this paper assumes that the expected

metric and asymmetric information cases andprofit is uniformly distributed and both 𝑚 and𝑑𝑝 are common knowledge.

Section 4 discusses the results of the analysis.
Finally, Section 5 concludes this paper.

To decrease the cost of difference, theowner must make a plan that narrows the dis-(2) Model

tribution and reduces business risk (hereafter,

This paper considers a budget-making

risk reduction plan). The owner, however, hasprocess in which a risk-neutral owner acting as

scarce time and information and must ask thea principal (she), and a risk-neutral profit center

manager to make the risk reduction plan during

manager acting as an agent (he) negotiate on a

the budget-making process. The manager’s ef-

forthcoming budget. Also, the manager is effort-

fort to make the risk reduction plan is assumed

averse and has no wealth to acquire a firm.

to be unobservable by the owner. With the risk

In the budget-making process, a target
profit for each profit center is decided based on

reduction plan, the distribution is estimated tobe [𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ] (𝑑𝑝 > 𝑑𝑓 ); without it, thethe firm-wide aspired profit. Hereafter, various

distribution remains [𝑚 − 𝑑𝑝 , 𝑚 + 𝑑𝑝 ].

kinds of budgets are formulated to realize each

The owner decides the target profit ℎ intarget profit, and resources are allocated to eachthe distribution and pays a bonus calculated us-

profit center. As stated in the Introduction, re-ing the amount of favorable variance. A favora-gardless of whether it is favorable or unfavorable, the difference between a profit center’s ac-

ble variance arises when ℎ ≤ 𝑥 ≤ 𝑚 + 𝑑𝑖 (𝑖 ={𝑝, 𝑓}), and the average favorable variance istual profit and its target profit is assumed to(𝑚 + 𝑑𝑖 − ℎ)⁄2 , since the distribution is uni-cause some kinds of idle losses. This paper no-form. Let the bonus coefficient be denoted as 𝛽tates actual profit as 𝑥, target profit as ℎ, andthe cost of difference, the cost stemming from( 0 ≤ 𝛽 < 1 ) and the average bonus as𝛽(𝑚 + 𝑑𝑖 − ℎ)⁄2. The probability of a favorable

the difference between the target profit and theactual one, as 𝛼|ℎ − 𝑥 | (𝛼 > 0), where the coef-variance is (𝑚 + 𝑑𝑖 − ℎ)⁄2𝑑𝑖 and the expectedbonus is 𝛽(𝑚 + 𝑑𝑖 − ℎ)2 ⁄4𝑑𝑖 . Since firms usu-

ficient of the cost of difference 𝛼 indicates theally cannot pay negative bonuses or decrease

degree to which the owner recognizes the differ-

fixed salaries when managers incur unfavorable

ence as a loss and decreases the utility of thevariances, this paper assumes that the bonus
22

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

payment to the manager is zero when unfavor-

on payments to employees. So, let this cap be de-able variance occurs.2

noted as 𝑃𝑚𝑎𝑥 and, for analytical ease, it is as-

The manager incurs the effort costs ofsumed that 𝑐̅ ≤ 𝑃𝑚𝑎𝑥 .

making the risk reduction plan and working inThis paper focuses on the budget-making

the mid-term. Let the effort costs of making theprocess, and the utility of each player is shownrisk reduction plan and working in the midterm be denoted as 𝑐1 (𝑐1 = {0, 𝑐̂1 }, 𝑐̂1 = 𝛾⁄𝑑𝑓 ,by the expected utility at the beginning of a pe-

𝛾 > 0) and 𝑐2 (𝑐2 = {0, 𝑐̃2 }, 𝑐̃2 = [𝑐2𝑚𝑖𝑛 , 𝑐2𝑚𝑎𝑥 ],𝑐2𝑚𝑖𝑛 > 0 , 𝑐2𝑚𝑎𝑥 = 𝛿 (𝑑𝑓+𝜖) , 𝜖 > 0 , 𝑐2𝑚𝑖𝑛 < 𝛿 𝜖 ),amount remaining after subtracting the ex-riod. The owner’s utility is equal to the residual
pected cost of difference, the fixed salary and therespectively, and 𝑐1 + 𝑐2 = 𝑐 . When 𝑐𝑗 = 0

expected bonus from the expected firm-wide
profit, which can be shown as Ε(𝑥 − 𝛼|ℎ −(𝑗 = {1,2}) it means that the manager does notincur any effort costs. The distribution remains[𝑚 − 𝑑𝑝 , 𝑚 + 𝑑𝑝 ] when 𝑐1 = 0, and the actual𝑥 |) − [𝑆 + 𝛽(𝑚 + 𝑑𝑖 − ℎ)2 ⁄4𝑑𝑖 ] . Conversely,
the manager’s utility is the residual amount remaining after subtracting the effort cost fromprofit is inevitably lim 𝑚 − 𝑑𝑖 + 𝜖 when 𝑐2 =the fixed salary and the expected bonus. As

ϵ→0

0. Thus, when 𝑐2 = 0, since the probability of anoted above, the effort cost is uncertain and thefavorable variance is approaching nil, the ex-manager is also risk neutral. Hence, he evalu-

pected bonus is assumed to be zero for simplicity.
In addition, during the budget-making process,ates his effort cost as 𝑐̅ and his utility is[𝑆 + 𝛽(𝑚 + 𝑑𝑖 − ℎ)2 ⁄4𝑑𝑖 ] − 𝑐̅ . Given the as-

𝑐̂1 is certain and a positive constant, and 𝑐̃2 issumption on the fixed salary and the effort cost,a random variable. As a result, 𝑐 is also a random variable, 𝑐~𝑁(𝑐̅, 𝜎 2 ), and is assumed to be

𝑆 = 𝑐̅ , the utility formula is simplified as𝛽(𝑚 + 𝑑𝑖 − ℎ)2 ⁄4𝑑𝑖 . In addition, his reserva-

common knowledge.

tion utility is assumed to be zero.

In addition to bonuses based on perfor-

The timeline of the events in this model

mance, employees are paid fixed salaries deter-is as follows:mined independently of their performance. According to the 2012 survey on work conditions

1.

Owner and manager observe past profits.

by the Ministry of Health, Labour and Welfare

2.

Owner communicates budget guidelines.

(Shuro Joken Sogo Chosa), fixed salaries are

3.

Owner decides bonus coefficient and target

mainly based on the “substance of work” and the

profit.

“skill of work accomplishment” that indicate an4.

effort cost. During the budget-making process,Manager makes risk reduction plan andworks.

such an effort cost is uncertain. Accordingly, this5.

paper assumes that the fixed salary 𝑆 is equal

Profit is realized. Owner and manager acquire payoffs, respectively.

to the expected value of the effort cost 𝑐̅.3

Firms
have funding constraints and must set a ceiling(3) Results

2 Since this assumption makes limited-liability constraints

data, it may not be generally accepted. However, the main
results of this paper are constant whether the fixed salaryis more than the expected effort cost or not. Moreover, toeconomize space, this paper adopts such an assumption.

satisfied, they are omitted in the following analysis.
3
Although this assumption is surely based on the actual

23

Journal of Japanese Management Vol.2, No.1, November 2017

1. No Hidden Action

ISSN 2189-9592

Since the above function is maximized at ℎ = 𝑚,

This subsection, as a benchmark, shows
the result when the owner can observe the man-ℎ𝐹𝐵 = 𝑚. In this case, the left-hand side of IR is𝛽𝑑𝑓 ⁄4. However, since the owner can zero out it,

ager’s action without any costs. In this case, thewe arrive at 𝛽 𝐹𝐵 = 0. ∎manager always makes a risk reduction planand the distribution is [𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ]. The

The above problem is equivalent to a min-problem that the owner solves is as follows.
Problemimization problem of the expected cost of difference. In addition, 𝛼[(𝑚 − ℎ)2 + 𝑑𝑓2 ]⁄2𝑑𝑓

FB

shown in the objective function is the expected
cost of difference. It is minimized at ℎ = 𝑚 andthe minimized cost of difference is 𝛼𝑑𝑓 ⁄2.

2

𝛽(𝑚 + 𝑑𝑓 − ℎ)max Ε(𝑥 − 𝛼 |ℎ − 𝑥 |) − [𝑆 +
]
𝛽,ℎ
4𝑑𝑓
subject to

2. Optimal Set Budget under Moral Hazard
In this subsection, the result is shown for2𝛽(𝑚 + 𝑑𝑓 − ℎ)
≥0
4𝑑𝑓

IR

the case in which the owner cannot observe themanager’s actions. In this scenario, in addition
to IR, the following incentive compatibility con-Constraint IR (individual rationality)straints are needed.

means that the owner must set the expected2

utility of the manager at a level greater than the𝛽(𝑚 + 𝑑𝑓 − ℎ)
𝑆+
− 𝑐̅
4𝑑𝑓

reservation utility. Subsequently, the solution to

IC1

this problem is as follows.
2≥𝑆+

Lemma. Suppose that the distribution is uniform, 𝑥~U[𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ] . When the owner𝛽(𝑚 + 𝑑𝑝 − ℎ)
− 𝑐̅
4𝑑𝑝
2

can observe the manager’s action, the target
profit is the mean of the distribution, ℎ𝐹𝐵 = 𝑚,and the bonus coefficient is zero, 𝛽𝐹𝐵 = 0.

𝛽(𝑚 + 𝑑𝑓 − ℎ)𝑆+− 𝑐̅ ≥ 𝑆 − 𝑐̂1
4𝑑𝑓

IC2

2

𝛽(𝑚 + 𝑑𝑓 − ℎ)𝑆+− 𝑐̅ ≥ 𝑆
4𝑑𝑓(Proof)IC3

Since IR is satisfied with an equation, the objective function is determined as follows. Notethat 𝑆 = 𝑐̅ and ℎ ∈ [𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ].
Ε(𝑥 − 𝛼|ℎ − 𝑥 |) − 𝑐̅𝑚+𝑑𝑓
𝑥 − 𝛼 |ℎ − 𝑥 |=∫𝑑𝑥 − 𝑐̅𝑚−𝑑𝑓 (𝑚 + 𝑑𝑓 ) − (𝑚 − 𝑑𝑓 )=𝑚−𝛼[(𝑚 − ℎ)2 + 𝑑𝑓2 ]2𝑑𝑓The left-hand sides of the constraints IC1,
IC2, and IC3 show the manager’s expected utility when he selects the action the owner prefers.
The right-hand side of each constraint shows
the manager’s expected utility for the following
situations: when he does not make a risk reduc-− 𝑐̅tion plan but works hard in the mid-term (IC1);

Let the target profit and the bonus coeffi-

he makes a risk reduction plan but does notcient be denoted as ℎ𝐹𝐵 and 𝛽 𝐹𝐵 , respectively.
24

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

work hard in the mid-term (IC2); and he does

𝑑𝑓 𝛥𝑑 > 0 and the left-hand side of the above in-

not both make a risk reduction plan and work

equality must be strictly positive. Accordingly,

hard in the mid-term.

the target profit must satisfy any one of the fol-

Having an elaborate plan makes it easier

lowing conditions.

to achieve a desired goal. Similarly, when the
manager makes a risk reduction plan, the effort

1. 𝑚 + 𝑑𝑓 − ℎ > 0 and 𝑚 − 𝑑𝑓 − ℎ > 0

cost of executing operations 𝑐2 is thought to be

2. 𝑚 + 𝑑𝑓 − ℎ < 0 and 𝑚 − 𝑑𝑓 − ℎ < 0smaller. Since the risk-neutral manager recognizes the random variable 𝑐̃2 as its mean, we

When the first condition is satisfied, thecan indicate the mean of 𝑐̃2 when 𝑐1 = 𝑐̂1 and
0𝑐2 , respec-

target profit must be set to strictly less than thelower limit of the distribution since 𝑚 − 𝑑𝑓 > ℎ.

0
< 𝑐2 ). Then, the combined effort cost

However, when the second condition is satisfied,

when the manager both makes a risk reduction

the target profit must be set to strictly more

1plan and works hard in the mid-term is 𝑐̂1 + 𝑐2 ,than the upper limit of the distribution since𝑚 + 𝑑𝑓 < ℎ. Thus, when IC1, IC2, and IC3 are

the one when 𝑐1 = 0 as
1
tively (𝑐2

1
𝑐2

and

and the effort cost when he only works hard in0

the mid-term is 𝑐2 . For ease of analysis, sup-all satisfied, the bonus coefficient is positive,

10
𝑐̂1 + 𝑐2 = 𝑐2 = 𝑐 . As a result, the effort

and the target profit is not set in the distributionpose
costs shown on both sides of IC1 are identical.4

after the creation of a risk reduction plan. ∎Regarding the incentive compatibility constraints, the following result is obtained.

When the owner seeks to satisfy all of the
incentive compatibility constraints, she cannot
set the target profit in [𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ]. The

Proposition 1. When IC1, IC2, and IC3 are sat-

isfied, the target profit does not exist in the distribution after the creation of a risk reductionplan.

manager can expect the above situation anddoes not make a risk reduction plan. Thus, hewould make a dummy plan and just report it.
Then, the manager engages in a budget game in(Proof)which he seeks to maximize his own bonus andGiven the assumption 𝑐̂1 > 0, when IC3

minimize the required target by proposing un-

is satisfied, IC2 is satisfied with a strict sign ofrealistic numbers during the budget-making

inequality. Also, when it is assumed that 𝑐̅ > 0,process.

the bonus coefficient must be 𝛽 > 0 to satisfy

However, if the distribution remains[𝑚 − 𝑑𝑝 , 𝑚 + 𝑑𝑝 ] and the target profit is not

IC3. As a result, IC1 is rewritten as follows,
𝛥𝑑 = 𝑑𝑝 − 𝑑𝑓 ,set in [𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ], the cost of difference
may increase. Since the owner can expect sucha situation, she must take measures to induce(𝑚 + 𝑑𝑓 − ℎ)(𝑚 − 𝑑𝑓 − ℎ) ≥ 𝑑𝑓 𝛥𝑑.

the manager to make a feasible risk reduction
Since 𝑑𝑝 > 0 and 𝑑𝑓 > 0 , this means thatplan.

4 The following numerical example explains this situation.

𝑐2 = 3 when 𝑐1 = 0. Thus, in each case, the combined effort cost is 𝑐 = 𝑐1 + 𝑐2 = 3.

Assume that 𝑐1 = {0,1}, 𝑐̃2 = [1,3] when 𝑐1 = 1, and𝑐̃2 = [1,5] when 𝑐1 = 0. Then, 𝑐2 = 2 when 𝑐1 = 1 and25

Journal of Japanese Management Vol.2, No.1, November 2017

If the manager makes a feasible risk re-

ISSN 2189-9592

Thus, the solution to this problem is as follows.

duction plan, the upper limit of the distribution
decreases. Accordingly, if the actual profit is in
the range of (𝑚 + 𝑑𝑓 , 𝑚 + 𝑑𝑝 ], it is highly prob-

Proposition 2. Suppose that the distribution is
uniform, 𝑥~U[𝑚 − 𝑑𝑓 , 𝑚 + 𝑑𝑓 ] . When theable that the manager do not make a risk reduction plan. The owner pays no bonus to the manager when the actual profit falls within (𝑚 +owner cannot observe the manager’s action, thetarget profit is ℎ 𝑆𝐵 = 𝑚, and the bonus coefficient is 𝛽 𝑆𝐵 = 4𝑐̅⁄𝑑𝑓 , if and only if 4𝑐̅ < 𝑑𝑓 .

𝑑𝑓 , 𝑚 + 𝑑𝑝 ] to motivate him to make the risk
reduction plan. However, if ℎ = 𝑚 + 𝑑𝑝 , the(Proof)manager is not adequately motivated to attain

Given the assumption 𝑐 > 0, when IC3

a budget. Hence, the owner must manipulate

is satisfied, IR is satisfied with a strict sign ofthe bonus coefficient as follows,inequality. In addition, under the assumption
𝑑𝑓 < 𝑑𝑝 , IC1’ is also satisfied with a strict sign of{inequality. As a result, IC3 is satisfied with a sign𝛽 > 0, 𝑖𝑓 ℎ ≤ 𝑥 ≤ 𝑚 + 𝑑𝑓,
𝛽 = 0,
𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒of equality. Solving it for ℎ, we find thatℎ = 𝑚 + 𝑑𝑓 ± √and IC1 turns out as follows.
2𝛽(𝑚 + 𝑑𝑓 − ℎ)𝛽(𝑚 + 𝑑𝑓 − ℎ)
≥
4𝑑𝑓
4𝑑𝑝

4𝑑𝑓 𝑐
𝛽

.

Note that if ℎ = 𝑚 + 𝑑𝑓 + √4𝑑𝑓 𝑐 ⁄𝛽 , IC3 is not

2

IC1’

satisfied due to the assumption of the bonus coefficient, 0 ≤ 𝛽 < 1 . Accordingly, let the target

profit in the case of asymmetric information be
Then, the problem the owner solves is as follows.
Problemdenoted as ℎ𝑆𝐵 ,ℎ𝑆𝐵 = 𝑚 + 𝑑𝑓 − √

𝑆𝐵

4𝑑𝑓 𝑐
𝛽

.

Substituting it into the objective function, the new2𝛽(𝑚 + 𝑑𝑓 − ℎ)max Ε(𝑥 − 𝛼 |ℎ − 𝑥 |) − [𝑆 +
]
𝛽,ℎ
4𝑑𝑓

objective function is as follows,

subject to

2𝑐

4𝑑𝑓 𝑐

𝛽

𝛽

max 𝑚 − 𝛼 [ − √𝛽+ 𝑑𝑓 ] − 2𝑐̅.

2𝛽(𝑚 + 𝑑𝑓 − ℎ)
≥0
4𝑑𝑓

IR

Let the solution be denoted as 𝛽 𝑆𝐵 . By first ordercondition,2𝛽(𝑚 + 𝑑𝑓 − ℎ)𝛽(𝑚 + 𝑑𝑓 − ℎ)
≥
4𝑑𝑓
4𝑑𝑝

2

IC1’

𝛽 𝑆𝐵 =.

Substituting it into ℎ𝑆𝐵 , we haveℎ 𝑆𝐵 = 𝑚.

2𝛽(𝑚 + 𝑑𝑓 − ℎ)
≥ 𝑐̅
4𝑑𝑓

4𝑐
𝑑𝑓

IC3

Given the assumption of the bonus coefficientand IC3, 0 < 𝛽 < 1, this means 0 < 4𝑐̅⁄𝑑𝑓 < 1.
Thus, the above solutions for 𝛽 𝑆𝐵 and ℎ𝑆𝐵 are26

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

derived if and only if 4𝑐̅ < 𝑑𝑓. ∎is decreasing. This means that the manager

The cost of difference expected at the beginning of a period is 𝛼[(𝑚 − ℎ)2 + 𝑑𝑓2 ]⁄2𝑑𝑓

must decrease his own expected utility by mak-and is specified by 𝛼 (the degree to which theincrease in effort cost and a decrease in his ex-

owner recognizes the cost of difference as a loss),ℎ (target profit), and 𝑚 and 𝑑𝑓 (mean and de-pected bonus. To reward the manager for in-

viation of the distribution, respectively, after the

manager a bonus that exceeds the acquired

creation of a risk reduction plan). Since 𝛼 andprofit by setting 𝛽 > 1. This does not pay theowner, and she sets the lower limit of 𝑑𝑓 as

ing a risk reduction plan that involves both ancreasing effort cost, the owner must pay the𝑚 are exogenous variables, the owner seeks tominimize the cost of difference by manipulatingℎ and 𝑑𝑓 . Whether there is symmetric infor-4𝑐̅ < 𝑑𝑓 .

mation or asymmetric information, both the dis-the case of asymmetric information is equiva-

tribution and the cost of difference are notlent to information rent under moral hazardchanged. Accordingly, the target profit is theand the owner encounters a trade-off between

mean of the distribution in each case. However,decreasing the cost of difference and increasing

since it is practically impossible to eliminate uncertainty, which means 𝑑𝑓 = 0, the lower limit

the manager’s bonus. Avoiding the diseconomyof the distribution must be 4𝑐̅ < 𝑑𝑓 .
By the assumption 𝑐̂1 = 𝛾⁄𝑑𝑓 , as 𝑑𝑓 isthe manager’s bonus exceeds the increase of her

The expected bonus for the manager inof decreasing the owner’s payoff by increasing
payoff by decreasing the cost of difference; thelower limit of 𝑑𝑓 is needed.

approaching zero, the effort cost of making arisk reduction plan 𝑐̂1 is exponentially increasing. Also, if 𝑑𝑓 could be close to zero, the uncer-

As a result, the manager’s bonus base is
secured and the target profit is equal to thetainty on the effort cost in the mid-term 𝑐̃2mean of the distribution. This means that thewould not be dispelled. Furthermore, by the as-owner prefers a budget that easily causes favorable variances or gives the manager infor-

sumption 𝑐2𝑚𝑎𝑥 = 𝛿 (𝑑𝑓+𝜖) , even though 𝑑𝑓 ismation rent. Agency theory has highlighted

approaching zero,is only gradually decreasing. In sum, as 𝑑𝑓 is decreasing, 𝑐̂1 is in-asymmetric information and opportunisticcreasing but 𝑐̃2 is difficult to decrease, and 𝑐̅ isincreasing. Therefore, 𝑑𝑓 depends on 𝑐̅ asleave information rent (e.g. Antle and Eppen,

stated in Proposition 2, and we find that 4𝑐̅ <𝑑𝑓 . In the case of symmetric information, theysis of this paper reveals that the reduction inlower limit of 𝑑𝑓 is the level at which 𝑆 = 𝑐̅and the owner desires it.

𝑐2𝑚𝑎𝑥

agent(s) as the reason that a principal must1985). In addition to the above factors, the analthe cost of difference causes information rent

and 𝑐̅ ≤ 𝑃𝑚𝑎𝑥

are satisfied.
The reason why the lower limit of 𝑑𝑓 is(4) Discussion

strictly more than 4𝑐̅ is that the owner must

This paper shows that the owner desires

pay a bonus to the manager in the case of asymmetric information. As 𝑑𝑓 decreases, the range

feasible budgets by adding the cost of differencein which the bonus coefficient 𝛽 is positive isanalysis of the previous section, we have the fol-

narrowing and the bonus base for the manager

lowing result: if the owner seeks to decrease theinto her utility function. Moreover, from the27

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

cost of difference, (1) the bonus paid to the man-to maximize profit. As criticized by Hope andager should be capped, and (2) the target set for

Fraser (2003) and Jensen (2001), the bonus cap

the manager should be loosed. This section ex-

carries the risk of causing dysfunctional behav-

amines the above two points.

ior from having employees not earn profit thatexceeds the upper limit of bonus bases. Alt-

1. Rationality of Bonus Cap

hough the bonus cap helps avoid the problem

A bonus cap, sometimes referred to as acaused by over-investment or out-of-production

bonus scheme (e.g., Healy, 1985), has been criti-

capital, it creates opportunity costs, that is, thecized in some studies (e.g., Hope and Fraser,

profit lost by the bonus cap. In sum, the choice2003). Also, some other studies have advocatedof whether to set a bonus cap mirrors the trade-a liner incentive scheme (e.g., Jensen, 2001, pp.

off when deciding whether to pursue profit max-

98-99; Stewart, 1991, pp. 233-241). To be sure,imization or avoid the cost of difference.

managers strive to maximize their profits if a

However, paying attention to the cost ofliner incentive scheme is adopted and this isdifference has the advantage of decreasing theseemingly favorable. However, managers takecost of capital in addition to avoiding over-in-

the risk to proceed with their operations in an

vestment. Public companies listed in Japan are

infeasible direction if such a scheme is adopted,

required to disclose earnings forecasts, and Mu-

and their strategy is unfavorable in terms oframiya (2005) noted that accurate forecasts con-minimizing the cost of difference. In fact, some

tribute to a decrease in the cost of capital. Also,

firms pursuing profit maximization decline insince such forecasts are based on budgets (Yan-earnings due to over-investment. For example,

agi, 2011, pp.72-88), ordering the manager to

Sumitomo Corporation, which rapidly ex-

make a risk reduction plan during a budget-

panded its natural resources businesses, wasmaking process and motivating him not to at-then required to book huge impairment losses

tain excessive favorable variance by using a bo-

because the capital invested in the businesses

nus cap improves the accuracy of disclosed fore-

was deemed irrecoverable (Nihon Keizai

casts, which then contributes to decreasing the

Shimbun,Also,

cost of capital. In the setting of this paper, if a

Mitsubishi Motors decided to cease its factorybudget is formulated around the upper limit ofoperations in the U.S. and aggregate its produc-

the expected profit distribution and the earn-tion capacity in its Okazaki factory. It was re-ings forecast is disclosed based on the budget, it

ported that this decision would make the Oka-

is inevitable that the forecast gets revised down-

zaki factory operate at nearly 100% capacity

ward. For example, Sony lowered its forecast for(Nihon Keizai Shimbun, August 21, 2015),

2014 several times, which was accompanied bywhich makes this nothing less than effort to de-a fall in its stock price. It was noted that Sony’s

crease the cost of difference, so-called idle capac-

top management required ideal goals evenity.

though Sony’s division managers submitted se-

September

30,2014).

However, as stated in the interpretationcurequantitativeplans(Nikkei

SangyoShimbun, November 5, 2013).

of Proposition 1, if the owner sets a cap on thebonus paid to the manager, he is not motivatedIn addition, several firms set a ceiling on
28

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

executives’ bonuses, and it has been said that

Also, Anthony and Govindarajan (2007) support

executives in such firms conduct earnings man-this conclusion concerning the tightness of theagement so that the estimated profit is inten-

target. Now, turning to Proposition 2, since thetionally lowered to the ceiling when the profit istarget is set at the mean of the expected profit

expected to exceed it (e.g., Healy, 1985). If such

distribution, the probability of target achieve-

firms do not set a ceiling on managers’ bonuses,

ment is 50%. Therefore, this indicates the valid-

executives would conduct reckless earnings

ity of Proposition 2 although we cannot simply

management because managers pursue highcompare Merchant and Manzoni (1989) and thisprofit to maximize their own bonuses. However,paper.

executives do not prefer this type of earnings

Furthermore, if the owner does not re-

management due to concerns about backlash

gard the cost of difference as a loss, she would

against future earnings. Accordingly, executives

hike a target to the upper limit of the distribu-

must guide managers not to yield profit to suchtion to minimize the bonus paid to the manager.

a degree when executives conduct earnings

In other words, depending on whether the costmanagement. Thus, a bonus cap that does notof difference is regarded as a loss, the tightness

pay a bonus for excessive favorable varianceof the target is subjective. Even though the por-helps prevent the reckless earnings manage-

tion that the target is lowered from the upper

ment.

limit of the distribution is not changed, one perIt has generally been thought that theson may view the target as tight, whereas an-

reason why firms set a ceiling on bonuses is aother may not, or may view it as including budg-

funding constraint. In addition to such a con-etary slack. For example, even if executives set

straint, this paper shows that a bonus cap cana tight target, rational stockholders who ade-

help a firm avoid losses caused by over-invest-

quately spread risk would likewise not deem it

ment, prevent an increase in the cost of capitalas tight. The same holds for conglomerates

following the revision of earnings forecasts, andthe higher people advance in hierarchy, theprevent reckless earnings management.

more they do not regard the cost of difference asa loss, but rather view a target as including

2. Rationality of Budgetary Slackbudgetary slack because the risks they face are

As stated in the interpretation of Propo-

dispersed. Budgetary slack is contingent on

sition 2, the owner aims to set the profit target

some kinds of subjective judgement (Kosuga,

at a level that the manager easily attains. In

1997, pp.196-198). This paper shows that thethis subsection, we examine the effectiveness ofdegree to which the cost of difference is regarded

such a target in terms of tightness. It has been

as a loss is one such subjective factor.

suggested that a tight target is challenging but

Budgetary slack has been thought of as

attainable (e.g., Anthony and Govindarajan

the portion that managers intentionally lower

2007, p.391). Merchant and Manzoni (1989),

budgets from attainable levels to maximize

surveying the profit center managers on the ex-their own bonuses. When a target is set as

ante subjective probability of attaining their tar-stated in Proposition 2, a manager can acquiregets, conclude that the target they can achieve

his bonus. Accordingly, the budget formulatedwith a probability of more than 50% is rational.

as stated in Proposition 2 might be viewed as29

Journal of Japanese Management Vol.2, No.1, November 2017

ISSN 2189-9592

one that includes budgetary slack. However,this paper can be seen as only representing rel-this kind of budgetary slack is not the portion aevant cases in which firms understated the costmanager intentionally lowers but the one anof difference. There must be other firms that pay

owner purposefully accepts. The reason why theattention to the cost of difference and some suchowner accepts budgetary slack is that she ex-

firms must achieve better performance thanpects the decrease in the cost of difference to re-others. To understand the overall trends, it isstore firm management. In other words, budg-

necessary to verify the characteristics on finan-

etary slack is considered to act as an essential

cial statements depending on whether a firmpart of managing a firm.5 Although there haverecognizes the impact of the cost of difference.

already been several studies showing the advantages of budgetary slack (e.g., Dunk, 1995),

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