Budget ratcheting in museums

Purpose – This study focuses on ratcheting and budget behavior in nonprofit museums. Specifically, the authors
examine how performance compared with the budget affects future revenue budgets, and how this differs from the extant literature focused on for-profit organizations. The study focuses specifically on the relationship between museums and their sources of public funding and how this affects how museums prepare budgets.

Design/methodology/approach – Based on four years of data covering 97 state-subsidized Danish museums, the authors analyze budget ratcheting using least absolute deviation (LAD) estimations in the form of median regressions.

Findings – The authors find that when actual revenue from admission charges is below the budget, the decrease in the following year’s budget is greater than the increase in the following year’s budget when actual revenue from admission charges is above the budget (i.e. the authors find asymmetrical ratcheting).

Research limitations/implications – The findings are based on a specific setting (Danish museums), and the results may not be generalizable to other settings.

Practical implications – This study provides insights into the museum sector and other sectors with similar characteristics and contributes to understanding the differences between museums and for-profit organizations when it comes to budgeting. As private-sector management practices are gaining ground in the museum sector, it is important to learn more about budgeting-related issues in this sector.

Originality/value – The asymmetrical ratcheting the authors find is the opposite of ratcheting typically found in for-profit organizations. The authors attribute the results to the incentive conflict between museums and their public funding sources. The authors point to the museums’ dependence on public funding as an explanation for the results and, thereby, extend the knowledge on ratcheting to organizations with different
characteristics than traditional, for-profit organizations.