Expense Accounts: A Source of Irrational Spending

Jul 21, 2009 by

Would you be willing to spend $3,000 for the priviledge of sitting in a 4″ wider chair for eight hours, and to be served a meal with “complimentary” wine? Would you be willing to spend someone else’s $3,000 for this priviledge? The wine only seems free when the ticket was purchased by someone else. First class air travel, like many other luxuries, is often purchased through the use of expense accounts.

Why are people less frugal when spending from someone else’s account than their own? The problem is that financial earmarks, like holiday giftcards, offer the opportunity for one category of consumption, and no real incentive for consuming less. All savings are forfeited, and as result, there is no incentive to save.

Currently, companies often focus on monitoring expenditures. Employees have an incentive to make this hard to do. The Treasure Island hotel and casino in Las Vegas offers its customers the option of receiving an unitemized invoice, enabling them to disguise embarrassing decadence into a lump sum. (In and of itself, there is nothing decadent about conducting business in Las Vegas; the city has a large and affordable supply of hotel rooms and meeting space.)

The solution to this problem is to allow decision makers to appropriate some of the gains of saving. Rather than blindly covering expense but penalizing extravagence, companies should give employees fixed expense budgets, and then return a percentage of the unspent budget to the employees as cash. This sort of policy would encourage self-directed frugality, as it would align the incentives of the employee and employer.

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