Tax authorities often leave the consequences of non-compliance unspecified. We examine how disclosing those consequences affects tax payment and income reporting in four experiments. In a field experiment with HM Revenue and Customs, letters randomized to more than 200,000 taxpayers with outstanding income-tax debts increased payment when they warned of unspecified further action. Messages specifying financial or administrative costs did not produce the same benefit. An online payment experiment with 2050 taxpayers across fourteen conditions, including 1194 in the principal factorial design, found that revealing the maximum fine lowered the stated likelihood of paying. The reduction occurred at both modest and severe revealed maxima. It also occurred among participants who learned that the fine exceeded their prior estimate, contrary to the prediction from belief updating. An incentivized experiment with 827 participants extended the effect to income declarations with money at stake, although declarations differed between the two disclosed maxima in this setting. A laboratory experiment with 239 participants recorded differences in pupil dilation across enforcement messages without detectable differences in measured visual attention. Together, the findings suggest that ambiguity about enforcement consequences contributes to compliance. The physiological evidence is consistent with an affective account of this relationship. Disclosing a maximum penalty can therefore have a behavioral cost that tax authorities should consider when communicating enforcement policy.
Organizational learning (OL) is a critical organizational capability. Yet designing management control (MC) that effectively supports OL is challenging, as learning outcomes are often intangible and unfold over extended time horizons. Employing situational strength theory, we examine combinations of MC practices that affect OL contingent on environmental uncertainty. Drawing on a survey of 210 senior business unit controllers, we use fuzzy-set Qualitative Comparative Analysis (fsQCA) to identify multiple combinations of MC practices that achieve high OL in different uncertainty contexts. In a subsequent step, we examine whether the situational strength of certain combinations of MC practices is associated with OL. Results show that in a low-uncertainty environment, the combined use of diverse performance measures and social controls, as well as performance pay and a mechanistic administrative structure, have a synergetic effect on OL. In a high-uncertainty context, the combined use of measure diversity and deliberate formal strategic planning is beneficial for achieving OL. Our results suggest that the effectiveness of MC practices for OL depends on aligning MC practices with the internal as well as the external context.
Auditor-client negotiations over contentious accounting issues can shape reported financial outcomes, yet little is known about how communication dynamics between audit committee (AC) members and auditors influence client negotiation behavior. We conduct an experiment in which experienced financial executives, assuming the role of chief financial officer, negotiate a disputed inventory obsolescence allowance with a simulated audit partner in the presence of an AC member; the AC member’s distributive communication style (offensive vs. defensive) and the audit partner’s reflective empathy (high vs. low) are manipulated between participants. Drawing on relational framing theory in interpersonal communication, we predict and find that a distributive-offensive AC communication style leads clients to establish their reporting positions and concede less to the auditor’s proposed adjustment, unless it is accompanied by high reflective empathy from the audit partner, which neutralizes this resistance. This pattern emerges in the client’s initial negotiation position and persists through the final negotiated allowance. Our findings suggest that auditors can use empathetic communication as a strategic tool to defuse the competitive posture that an assertive governance signal may provoke. Overall, our results provide insights into how AC members’ and auditors’ communication styles jointly shape client negotiation behavior, highlighting the importance of communication strategies in achieving effective audit negotiation outcomes.
We examine how bonus deferral and bonus recovery affect performance in an effort-sensitive task, where improving overall performance requires effort towards output quantity and output quality. Deferred bonuses and bonus recovery are important elements in contemporary incentive schemes designed to motivate employees to act in the best interest of the firm. We propose that bonus deferral improves performance by encouraging employees to adopt an abstract mindset that focuses on behavior for the good of the firm (“to do the right thing”) and thus to exert more effort. In contrast, bonus recovery serves an effort-directing role by indicating undesirable behavior that should be avoided. Bonus recovery activates a mindset that focuses on the monetary implications of their behavior and thus supersedes the abstract mindset of bonus deferral and its positive effects. Our experimental results show that bonus deferral leads to higher performance quantity; in contrast, bonus recovery increases performance quality, the performance domain related to bonus recovery, but at the expense of performance quantity. Furthermore, we find that bonus recovery counteracts the positive effects of bonus deferral and leads to a reduction in overall performance. Two supplemental experiments provide direct process evidence supporting the proposed theoretical mechanism. Our study contributes to the debate on effective compensation by showing that combining bonus deferral and bonus recovery may have undesirable consequences on effort provision and allocation.
