Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts
Principals make decisions on various issues, ranging from contract design to control system implementation. Few studies examine the principal's active role in these decisions. We experimentally investigate this role by studying how a principal's choice of an incentive contract that may dis...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2016
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| Online Access: | https://hdl.handle.net/10356/81901 http://hdl.handle.net/10220/39741 |
| _version_ | 1824456321740570624 |
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| author | Cardinaels, Eddy Yin, Huaxiang |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Cardinaels, Eddy Yin, Huaxiang |
| author_sort | Cardinaels, Eddy |
| collection | NTU |
| description | Principals make decisions on various issues, ranging from contract design to control system implementation. Few studies examine the principal's active role in these decisions. We experimentally investigate this role by studying how a principal's choice of an incentive contract that may discourage misrepresentation, compared to a fixed-salary contract, affects the honesty of his or her agents’ cost reporting. Results show that, besides an incentive effect and a principal trust effect, the active choice for incentives produces a negative “information leakage” effect. When principals use incentives, their choices not only incentivize truthful reporting and signal distrust, but they also leak important information about the social norm, namely, that other agents are likely to report dishonestly. Agents conform to this social norm by misrepresenting cost information more. Our results have important practical implications. Managers must recognize that their decisions can leak information to their agents, which may produce unanticipated consequences for the social norms of the organization. |
| first_indexed | 2025-02-19T03:52:15Z |
| format | Journal Article |
| id | ntu-10356/81901 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2025-02-19T03:52:15Z |
| publishDate | 2016 |
| record_format | dspace |
| spelling | ntu-10356/819012023-05-19T06:44:41Z Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts Cardinaels, Eddy Yin, Huaxiang Nanyang Business School Social norms Incentive contract Information leakage effect Honesty Principals make decisions on various issues, ranging from contract design to control system implementation. Few studies examine the principal's active role in these decisions. We experimentally investigate this role by studying how a principal's choice of an incentive contract that may discourage misrepresentation, compared to a fixed-salary contract, affects the honesty of his or her agents’ cost reporting. Results show that, besides an incentive effect and a principal trust effect, the active choice for incentives produces a negative “information leakage” effect. When principals use incentives, their choices not only incentivize truthful reporting and signal distrust, but they also leak important information about the social norm, namely, that other agents are likely to report dishonestly. Agents conform to this social norm by misrepresenting cost information more. Our results have important practical implications. Managers must recognize that their decisions can leak information to their agents, which may produce unanticipated consequences for the social norms of the organization. Accepted version 2016-01-21T05:24:51Z 2019-12-06T14:42:40Z 2016-01-21T05:24:51Z 2019-12-06T14:42:40Z 2015 Journal Article Cardinaels, E., & Yin, H. (2015). Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts. Journal of Accounting Research, 53(5), 985-1015. 0021-8456 https://hdl.handle.net/10356/81901 http://hdl.handle.net/10220/39741 10.1111/1475-679X.12093 188430 en Journal of Accounting Research © 2015 Accounting Research Center. This is the author created version of a work that has been peer reviewed and accepted for publication in Journal of Accounting Research, published by University of Chicago on behalf of Accounting Research Center. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1111/1475-679X.12093]. 43 p. application/pdf |
| spellingShingle | Social norms Incentive contract Information leakage effect Honesty Cardinaels, Eddy Yin, Huaxiang Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts |
| title | Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts |
| title_full | Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts |
| title_fullStr | Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts |
| title_full_unstemmed | Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts |
| title_short | Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts |
| title_sort | think twice before going for incentives social norms and the principal s decision on compensation contracts |
| topic | Social norms Incentive contract Information leakage effect Honesty |
| url | https://hdl.handle.net/10356/81901 http://hdl.handle.net/10220/39741 |
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