ABSTRACT Prior contract framing research finds that agents generally choose to provide greater effort under penalty contracts than under economically equivalent bonus contracts. At the same time, many individuals tend to be overconfident in their own abilities, which may alter agents’ expectancies when making effort provision decisions. In this study, we extend the contract framing literature by conducting an experiment in which participants can improve the likelihood of earning a bonus or avoiding a penalty by providing greater costly effort and by performing well on the experimental task. We find that participants who are not overconfident in their ability to perform the task well exhibit the general contract framing effect, whereas overconfident participants do not. This suggests that for work tasks where production is a function of both effort and ability, the preponderance of overconfident individuals consistent with the “better-than-average effect” mutes the effect of contract framing on effort. Data Availability: Contact the authors. JEL Classifications: M49; M12; M11.

Information asymmetry is fundamental to participative budgeting. Hannan, Rankin, and Towry (2006, "HRT") develop a nuanced theory regarding the effect of information asymmetry on slack. The authors provide evidence that suggests increasing the precision of a superior's information system, thereby reducing information asymmetry, can increase slack. We develop a refined version of HRT's theory by incorporating evidence of how nonpecuniary incentives affect subordinates' reporting slack from research subsequent to HRT. Our updated theory predicts that slack decreases as information system precision increases, opposite to the results in HRT. To test our refined theory, we replicate HRT's experiment and find results consistent with our theory. Our results support HRT's general theory but highlight the importance of establishing regularities of how nonpecuniary incentives affect behavior in accounting. Specifically, our updated theory and new evidence suggest that improving information system precision decreases budgetary slack, contrary to the results suggested in HRT.

ABSTRACT This study investigates, via an experiment, how the decentralization of a firm’s selection process affects the caliber of the chosen candidate in a team-based environment. We predict and find that, when decision makers have comprehensive and unambiguous candidate-specific information regarding who is the best for the job, the quality of the selected candidates is lower under a decentralized versus centralized selection process. We also find that nonpecuniary status concerns drive the effect. Results of two boundary conditions reveal that, as the clarity of information regarding who is the best candidate for the job decreases (due to decision-makers having weaker or mixed signals about job candidates), the quality of selected candidates becomes no worse under a decentralized than under a centralized selection process. Overall, our results indicate that nonpecuniary status considerations and information environment can influence candidate selection decisions in organizations. Data Availability: Data are available from the authors upon request.

ABSTRACT Many organizations are moving toward a more open, transparent working environment. However, a concurrent trend toward remote work in organizations could moderate the effect of this move toward organizational openness by reducing organizational identification. This study investigates the joint effect of organizational identification and reporting environment openness on managerial reporting behavior. Using an experiment, we find that weak versus strong organizational identification leads to greater slack creation in an open reporting environment, but this effect attenuates in a closed reporting environment. By speaking to the joint effect of internal reporting environment openness and organizational identification, this study contributes to our understanding of the theoretical drivers of misreporting and how they interact with concurrent trends in practice. Data Availability: The data used in this paper are available upon request.

ABSTRACT We experimentally investigate how subordinates’ budget reporting in hierarchical organizations is influenced by social distance between subordinates and their direct manager. Although prior research promotes reducing this social distance to improve cooperation and efficiency, we contend that reduced social distance can differentially influence budget reporting, conditional on the manager’s stake in the residual claim. As predicted, we find through two studies that the effect of reduced social distance changes from increasing subordinates’ honesty to decreasing subordinates’ honesty as the manager’s stake in the residual claim decreases. We also find that subordinates’ concern for the manager’s economic well-being and concern about the manager’s impression of their reporting behavior mediate these results. The implications of our findings for management accounting theory and practice are discussed. Data Availability: Please contact the authors. JEL Classifications: C91; D91; M41.

We use a laboratory experiment to examine a multitask environment common to practice, in which managers have multiple responsibilities, including both managerial reporting, as in participative budgeting settings, and effort provision toward daily tasks. Consistent with typical contracting arrangements, we examine incomplete contracts where honesty and effort are not enforceable. In such a multitask environment, when employers choose to offer comparatively generous wages to managers, we predict that managers will elect to provide higher effort. Meanwhile, we remain agnostic ex ante about the degree of misreporting due to findings in studies on gift exchange, moral licensing, and moral wiggle room. Overall, we find evidence that reciprocity, consistent with the gift-exchange model, does extend across both tasks. Implications for theory and practice are discussed.

Our study examines superiors' allocation decisions for otherwise homogeneous agents facing disparate performance risk (i.e., unequal likelihoods a given amount of effort will translate to an anticipated level of performance). We predict and find that superiors sympathize, through their bonus allocation decisions, with those agents confronted with greater performance risk. However, this behavior changes when superiors are responsible for allocating initial resources between the agents and have task-irrelevant reputational information concerning the agents, such that superiors favor the advantaged agent and give less sympathy to the disadvantaged agent. We provide additional evidence that such favoritism toward the advantaged agent leads to disparity in agents' fairness and satisfaction perceptions. Our results have implications for organizations, given the pervasiveness of discretion in allocation decisions and concerns for fairness, job satisfaction, and their effects on performance.

ABSTRACTThis study examines the benefits of employee involvement in feedback system design for cooperation. Understanding how to enhance cooperation is important given the increasing use of team settings in practice. Control systems often provide feedback on cooperative actions of coworkers, which can help enable cooperation in teams and between organizational units. We predict that involvement in the design of feedback systems can be a source of trust between employees and enhances cooperation. This is particularly important for dynamic environments, in which an incomplete feedback system which initially provides perfect signals of cooperation no longer does so after the environment changes. Adding to prior evidence, we find that an incomplete feedback system can benefit cooperation in a static environment, but the benefit is greater when employees were initially involved in its design. In a dynamic environment, an incomplete feedback system fails to facilitate cooperation unless employees were involved in its design. Our results identify a behavioral benefit for firms that grant decision rights to employees as part of their organizational architecture.

Many organizations are moving towards a more open, transparent working environment. However, a concurrent trend towards remote work in organizations could moderate the effect of this move towards organizational openness by reducing organizational identification. This study investigates the moderating effect of organizational identification on the effect of reporting environment openness on managerial misreporting behavior. Using an experiment, we find that organizational identification significantly mitigates the increase in slack from an open reporting environment compared to a closed reporting environment, such that reporting environment openness does not significantly increase slack with a strong organizational identification. By speaking to the joint effect of internal reporting environment openness and organizational identification, this study contributes to our understanding of the theoretical drivers of misreporting and how they interact with concurrent trends in practice.

We experimentally investigate how increases in legally required minimum wages affect wage offers, wage premiums (i.e., the excess of wages over the minimum wage), and employee effort. Prior research has documented a gift-exchange relationship between firms and employees, whereby higher wage offers lead to higher effort. However, when the minimum wage increases, expectations regarding gift wages may also change. We predict that, following such a change, firms and employees will self-servingly determine their reference point for gift wages. As a result, while firms will increase wage offers, wage premiums will decline, and thus employees will not increase their effort. The results of (1) a laboratory experiment and (2) two online experiments are consistent with our predictions, suggesting that minimum-wage increases can have a negative effect on employee effort. Ultimately, employees respond to equivalent wages differently depending on the context surrounding the wage level. Implications for theory and practice are discussed.

Understanding when incentive contracts are effective is important for organizations. Prior research documents that while employees generally prefer to work under contracts that include bonuses, employees exert more effort under economically equivalent penalty contracts. One reason for this is that penalties cause employees to experience greater expected disappointment than do bonuses. This study extends prior research in this area by documenting that external locus of control (ELOC), an individual characteristic, helps explain how different employees respond to incentive contracts. We predict and find that, compared to individuals with higher ELOC, individuals with lower ELOC are less susceptible to contract frame-induced differences in expected disappointment and not as motivated by penalty contracts compared to bonus contracts. This finding extends theory on contract framing and has important implications for organizations. Our results suggest that penalty provisions are most efficacious at lower ranks in the organization where higher ELOC is more common.

This study investigates the effect of subordinate perceptions of the legitimacy of the superior in her role on subordinate misreporting. Using social norm theory regarding property rights, we predict that when subordinates perceive a superior as having more role legitimacy, they perceive the superior as being a more rightful claimant of project profits, which reduces misreporting. We test this prediction using a participative budgeting experiment that manipulates perceptions of the superior's role legitimacy. We find that budgetary slack is lower when subordinates perceive superiors to be legitimate in their roles than when subordinates perceive superiors to be illegitimate. Further, comparisons to a baseline treatment intended to induce neutral perceptions of role legitimacy, as in prior research, suggest that superior role legitimacy decreases slack. Supplemental experiments suggest that these results are generally robust to several design choices. The results from our three experiments suggest that role legitimacy decreases slack relative to random (neutral) perceptions; however, we do not find a statistically significant increase in slack from role illegitimacy relative to random perceptions across our three experiments. We discuss methodological implications from focusing on promoting role legitimacy and implications for practice, which has largely focused on problems from, and avoidance of, illegitimacy.

We examine theoretically and experimentally how combining between-team and within-team incentives affects behavior in team tournaments. Theory predicts that free-riding will occur when there are only between-team incentives, and offering within-team incentives may solve this problem. However, if individuals collude, then within-team incentives may not be as effective at reducing free-riding. Consistent with the theoretical predictions, the results of our experiment indicate that although between-team incentives are effective at increasing individual effort, there is substantial free-riding and declining effort over time. Importantly, a combination of between-team and within-team incentives is effective not only at generating effort but also at sustaining effort over time, mitigating free-riding problem, increasing cooperation and decreasing collusion within teams.

ABSTRACT Many organizations offer profit sharing plans to motivate increased effort and goal congruence. However, an unintended consequence of such plans may be to reduce honesty in managerial reporting. We investigate two commonly observed profit sharing plans (individual and pooled) in a laboratory experiment where multiple agents with private cost information submit budget requests to an employer. Consistent with our prediction based on crowding theory, our findings suggest that honesty is reduced in the presence of an individual profit sharing plan. However, when a pooled profit sharing plan is used, the adverse effects on honesty are partially mitigated. Our results suggest that an unintended consequence of profit sharing (decreased honesty) can be mitigated through interdependency from pooled plans. The results have practical implications, given that organizations have flexibility in establishing both the size and scope of their profit sharing plans. Our study also contributes to our understanding of reporting behavior, particularly in multi‐agent settings.

In this paper, we investigate how increasing transparency about managers' treatment of their employees affects the tendency of employees to initiate collusion. Building on behavioral economics theory, we argue that employees who are treated less kindly by their managers are more willing to initiate or join a collusive agreement. We hypothesize that internal transparency affects collusion in two ways. First, by revealing how kindly employees are treated by their managers, transparency increases or decreases the probability that individuals are singled out as potential “partners in crime.” Second, increasing transparency incentivizes managers to treat employees more kindly, which in turn reduces employees’ inclination to initiate collusion. The results of two experiments generally support the theory. We discuss the implications of our study for research and practice.

In this study, we experimentally investigate how performance risk and relational risk affect a principal’s willingness to offer gift, bonus, or penalty contracts and the subsequent motivational effect that these three contracts have on agents. Prior literature has not directly compared performance-contingent contracts to gift contracts, and extrapolation from existing empirical data is difficult because the literature has typically examined each in settings focused only on the mechanism through which each contract acts (i.e., interactive settings for gift exchange and settings with stochastic production and unobservable effort for performance-contingent contracts). We combine features of both settings and construct a willingness-to-pay (WTP) measure indicative of the principal’s propensity to offer a contract. Comparing the WTPs for the contracts, we find that gift exchange contracts are less attractive to principals than performance-contingent contracts. More importantly, we demonstrate that performance-contingent contracts evoke reciprocity concerns, suggesting that they function as both incentive compatible instruments, consistent with agency theory, and as behavioral instruments, consistent with models of gift exchange.

Employees often find themselves working in organizations where their jobs have multiple dimensions. An often proposed solution to motivating employees in multidimensional environments is for organizations to use incentive compensation. Incentive compensation can both direct employees’ attention (attention-directing property) and motivate their effort levels (effort-inducing property) but incentive compensation might not always be optimal in multi-dimensional settings. Thus, it is important to better understand the two proposed properties of incentive compensation through which incentive compensation motivates employee performance. Conducting an experiment in a multidimensional environment that contains quantity and quality task dimensions, we find that the incremental effectiveness of the effort-inducing property over the attention-directing property on performance quantity and performance quality varies depending on the task dimension toward which attention is directed and effort is induced. Specifically, the effort-inducing property has a positive incremental effect over the attention-directing property on performance quality when the quality dimension is incentivized; however, the effort-inducing property does not have a positive incremental effect over the attention-directing property on performance quantity when the quantity dimension is incentivized. This study provides important insight regarding the properties of incentive compensation.

While managers commonly possess private information regarding future production cost when developing their cost budget, they also face outcome uncertainty regarding that future cost. This outcome uncertainty, however, has largely been ignored by experimental researchers examining various controls for opportunistic budgetary slack. Social norm theory suggests that managers may view outcome uncertainty as an opportunity to evade an honesty norm and thereby increase budgetary slack. Alternately, the theory suggests that managers may view outcome uncertainty as a cue that they are expected to behave responsibly in their fiduciary role and thereby decrease budgetary slack. We test these competing theoretical effects using a participative budgeting experiment found in the literature. We find evidence that, rather than encouraging opportunism in managerial reporting, outcome uncertainty activates a responsibility norm that reduces budgetary slack. Specifically, we find that outcome uncertainty primes some managers to voluntarily share the risk of higher production cost with their principal, which leads to a decrease in budgetary slack relative to an experimental condition with no outcome uncertainty. This study extends the literature in participative budgeting by examining norm behavior under outcome uncertainty and helps explain the continued use of this organizational control in practice.

This study examines the effects of profit-sharing on honesty in managerial reporting. While profit-sharing plans are widely used, there remains a need for understanding how profit-sharing plans affect honesty in managerial reporting. We investigate two commonly observed profit-sharing plans (individual and pooled) in a laboratory experiment where individuals with private cost information submit budget requests. Consistent with our prediction based on motivation crowding theory, our findings suggest that honesty is reduced in the presence of an individual profit-sharing plan. When the profit-sharing plan is expanded to a pooled profit-sharing plan, the adverse effects of the profit-sharing plans are partially mitigated. This study expands our understanding of motivation crowding theory in accounting literature using a non-effort based task. The findings of this study reveal a potential unintended consequence of using profit-sharing plans and have practical implications on the design of control systems for organizations, especially in settings focused on reporting.