Financial planning in the public sector and the newsvendor problem

Abstract

The purpose of this paper is to study the phenomenon of lapsed funding that occurs within the public sector using the framework of the Newsvendor Problem. Under this framework, we observe that lapsed funding is a natural outcome of the planning system when the financial manager is trying to maximize the value added to his unit. Centralizing control of operating budgets of homogeneous units is shown to reduce lapsed funds and improve their overall performance.