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It has long been recognized that padding of budgets is a concern that can complicate the practice of resource allocation. At the same time, experimental evidence suggests budget padding is somewhat restrained by a managerial preference for honesty. This paper models the confluence of these two incentives and considers the effect on optimal budgeting policies. In the model, budgetary transfers are established so as to reduce the manager's gain from padding which, in turn, forces the manager to think twice before seeking more funds. An effect of this optimal contract is that when facing a manager whose preference for honesty is uncertain, the firm encourages honesty but is resigned to the fact that padding may appear. Contrary to casual intuition, the extent of equilibrium budget padding is not necessarily monotonic in either the extent of information asymmetry or the prevalence of managers who value honesty. ©2006 American Accounting Association