An Experimental Study of Endogenous Discretionary Controls on Employee Effort

Douthit, Jeremy; Liu, Jing; Schwartz, Steven T.; Young, Richard

doi:10.1080/09638180.2022.2063151

Cited by 3 publications

(4 citation statements)

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“…The superior acts kindly toward her subordinate, trusting him to return that gift-for example, by providing increased effort in return for a fixed wage (Hannan 2005). There is considerable evidence of gift exchange (Hannan 2005, Kuang and Moser 2009, Chen and Sandino 2012, Maas et al 2012, Douthit et al 2022). However, certain situational factors, such as unequal treatment (Brown et al 2015), excessive labor supply (Choi 2014, Majerczyk 2018, a legal minimum wage (Brink et al 2021), or formal control (Christ et al 2012, Christ 2013, Abdel-Rahim and Liu 2021, can reduce the efficiency of gift-exchange contracts.…”

Section: Do Good Intentions Pay Off? Employee Responses To Well-inten...mentioning

confidence: 99%

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Do Good Intentions Pay Off? Employee Responses to Well-Intended Actions with Risky Outcomes

Ostermaier

Schäfer

2022

European Accounting Review

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How does a subordinate react to the superior's well-intended action when it is not certain that it will produce the intended outcome? The risk associated with the outcome creates moral wiggle room and thus poses a threat to the gift exchange between the superior and the subordinate. In a laboratory experiment, we first find that subordinates continue to reciprocate if the outcome risk is high. Second, however, subordinates' response to a well-intended action that increases outcome risk depends on their inequality aversion. Weakly inequality-averse subordinates repay a kind action with a kind reaction if it decreases, but not if it increases, their outcome risk, whereas strongly inequality-averse subordinates react alike in both cases. Hence, a well-intended action is less worthwhile for subordinates if it increases than if it decreases outcome risk.

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Section: Do Good Intentions Pay Off? Employee Responses To Well-inten...mentioning

confidence: 99%

“…For our study, we adapt the gift-exchange experiment introduced by Fehr et al (1993), which has often been used in the accounting literature (Hannan 2005, Kuang and Moser 2009, Chan et al 2021, Douthit et al 2022. Participants are randomly assigned as superiors and subordinates, who interact anonymously in dyadic firms for a single period.…”

Section: Settingmentioning

confidence: 99%

Do Good Intentions Pay Off? Employee Responses to Well-Intended Actions with Risky Outcomes

Ostermaier

Schäfer

2022

European Accounting Review

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“…cultural differences), labor market variables (e.g. increased demand for labor, and legal requirements to increase minimum wages) or the source of contracts can reduce the effectiveness of the gift-exchange contracts in generating efficient economic outcomes through trust and reciprocity (Choi, 2014; Brink et al ., 2020; Abdel-Rahim et al ., 2021; Liu et al ., 2022; Douthit et al ., 2022). In this study, we extend this growing stream of accounting research on gift-exchange contracts by examining how workplace penalties that punishes employees' shirking on effort impact the effectiveness of trust and reciprocity in these contracts.…”

Section: Introductionmentioning

confidence: 99%

“…In the well-known employment contract based on the gift-exchange economic premise, accounting researchers have investigated social norms such as trust and reciprocity (e.g. Hannan, 2005; Kuang and Moser, 2009; Brink et al ., 2020; Douthit et al ., 2022). In such contracts, researchers find supporting empirical evidence that employers' choice to offer a premium wage in excess of the minimum market wage is translated as trust by employees who in turn exert an effort level in excess of the minimum work standard as a way to reciprocate (Hannan, 2005; Kuang and Moser, 2009).…”

Section: Introductionmentioning

confidence: 99%

An experimental study on the effect of penalties on employers' trust and employees' reciprocity and the moderating effect of communication

Abdel-Rahim,

Liu

2023

JAAR

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PurposeThere is growing scholarly interest in the use of penalty in employment contracts which reduce employees' pay if the employee's performance does not meet a pre-specified performance threshold. Prior accounting research has focused exclusively on the effect of penalty on employee performance. In this study, the authors extend earlier research by examining how penalty affects the employers' wage offers. Prior research suggests that employers' generous wage offers in employment contracts are normally translated as trust by employees who in turn reciprocate with higher effort. The authors present a theory that predicts penalty reduces employers' wage offers. Then, the authors propose unrestricted communication between employers and employees as a potential moderator for the negative effect of penalty on trust and reciprocity.Design/methodology/approachThe authors implement a controlled lab experiment with a 2 × 3 experimental design (Penalty: Present and Absent; and Communication: None, One-Way and Two-Way).FindingsThe authors develop their predictions by utilizing insights from motivational-crowding and organizational communication theories. The authors hypothesize and find evidence that employers' ability to penalize employees can reduce employers' motivation to offer generous wages. As a result, reduced trust demotivates employees to provide high effort. However, the authors find that a two-way communication moderates the negative effect of penalties by restoring trust, thereby, increasing reciprocity. Finally, the authors find evidence that relationship-oriented messages explain the moderating effect of communication.Research limitations/implicationsThis study is subject to limitations inherent in all experimental studies. The decisions in the study experiment are less complex than those found in practice. Moreover, there are significantly higher costs and potential benefits to shirk on effort in practice. The authors encourage future research on other organizational features that would influence the generalizability of their theory and results. Nonetheless, this study makes an important contribution to the literature on trust, reciprocity, gift-exchange contracts, managerial controls and communication.Practical implicationsThis paper has several important implications for theory and practice. The authors show that the presence of penalty may not automatically result in increasing employees' effort level, contrary to traditional economic theory predictions. This effect is driven mainly by the crowding out effect of a penalty on employers' desire to signal trust. Therefore, the presence of an open communication channel may become an important tool to reverse the psychological effect of reduced trust when penalty is present. Therefore, the study's findings contribute to the trust–reciprocity literature on how management control system influences employers' and employees' behavior. These findings are especially germane given the trend in the workplace toward establishing open communication at different levels within the firm hierarchy. The study also contributes to the literature on trust–reciprocity as critical informal controls and social norms in accounting practices (Bicchieri, 2006; Stevens, 2019), shedding light on how firms may influence employees' reciprocity in management control practices and induce them to act in line with the firm's objectives by opening communication channels.Originality/valuePrior accounting research document that penalty in employment contracts increases employee performance due to loss aversion. The study, however, demonstrates that the positive effect of penalty is not sustained in a gift-exchange contract. Specifically, the study's experimental results provide evidence that the availability of penalties can psychologically change the way employers perceive their decisions on offering generous wages (i.e. trust) and consequently reduce employees' reciprocation of high effort levels. Yet, the authors propose a two-way communication as a restorative mechanism for the lost trust. Implications for theory and practice are discussed.

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Using Large Language Models to Explore Contextualization Effects in Economics-Based Accounting Experiments

Edossa,

Gassen,

Maas

2024

Preprint

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An Experimental Study of Endogenous Discretionary Controls on Employee Effort

Cited by 3 publications

References 55 publications

Do Good Intentions Pay Off? Employee Responses to Well-Intended Actions with Risky Outcomes

Do Good Intentions Pay Off? Employee Responses to Well-Intended Actions with Risky Outcomes

An experimental study on the effect of penalties on employers' trust and employees' reciprocity and the moderating effect of communication

Using Large Language Models to Explore Contextualization Effects in Economics-Based Accounting Experiments

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