Public and Private Forms of Opportunism within the Organization: A Joint Examination of Budget and Effort Behavior

Abstract

ABSTRACT:We assert that some forms of opportunistic behavior within the organization are relatively transparent and, therefore, public in nature. Further, while organizations can tightly control such public opportunism, it may not be optimal for them to do so in the presence of private opportunism. To study how public and private forms of opportunism differ and interact, we jointly examine budget and effort behavior in a participative budgeting experiment. We group participants into producer / manager pairs and set the parameters such that the producer extracts the largest share of surplus from the manager by publicly setting the budget at zero and privately providing low effort. When the producer unilaterally sets the budget, the public opportunism of budgetary slack is higher and more affected by learning than the private opportunism of low effort. Giving the manager the power to reject the budget not only reduces budgetary slack by about 50 percent, but also generates reciprocity expectations and behavior. In particular, managers who allow more budgetary slack expect and receive higher effort from their producers on average. This reciprocity increases organizational performance by increasing the expected pay of the manager without decreasing the expected pay of the producer.

The Robustness of Honesty Effects on Budget Proposals when the Superior has Rejection Authority

“…This was important to control for reputation and other social effects that were not the focus of our study and to increase the theoretical link with Antle and Eppen's (1985) single-period model. 12 Similar to prior studies with superior rejection authority (e.g., Schatzberg and Stevens 2008;RSY 2008), all of our descriptive statistics and statistical analyses include data from periods where the subordinate's budget was rejected. 13 To control for the lack of independence caused by each participant making multiple decisions, the average level of slack over all decision periods is recorded for each participant and treated as a single observation for all our hypothesis tests utilizing ANOVAs.…”

“…Experimental researchers have documented ''gift exchange'' behavior whereby superiors pay subordinates above-market wages in exchange for above-minimal effort (Akerlof 1982;Fehr, Kirchsteiger, and Riedl 1993;Hannan 2005;Kuang and Moser 2009;Douthit et al 2012). Despite the abundance of experimental studies of reciprocity in contracting settings, researchers in accounting have only recently begun to examine reciprocity in a budgeting setting (Schatzberg and Stevens 2008;Zhang 2008). We argue that honesty and reciprocity represent complementary social norms in a participative budgeting setting.…”

“…5 Following the strategic budgeting setting in Schatzberg and Stevens (2008), we pay the subordinate's fixed salary from the superior's endowment rather than from the experimenter, as in RSY. This design choice is likely to capture an important aspect of budgeting settings where the resources of the firm are limited and the superior is thereby motivated to be efficient with those resources.…”

Can a Code of Ethics Improve Manager Behavior and Investor Confidence? An Experimental Study

“…The idea that social norms may be activated to control the opportunism of the manager is attractive because it suggests an alternative form of organizational control that may be less costly than financial incentives and other controls suggested by traditional agency theory (Stevens and Thevaranjan 2010). The literature in management accounting has developed a growing body of agency-based experiments documenting the effectiveness of social norms to control manager opportunism in contracting settings (e.g., Evans et al 2001;Stevens 2002;Webb 2002;Hannan et al 2006;Rankin et al 2008;Schatzberg and Stevens 2008;Hobson et al 2011). This body of experimental research along with experimental research in economics has motivated some theorists to incorporate social norms in their economic models of the firm (e.g., Mittendorf 2006;Fischer and Huddart 2008;Stevens and Thevaranjan 2010).…”

Can Agent Cheap Talk Mitigate Agency Problems in the Presence of a Noisy Performance Measure? An Experimental Test in a Single- and Multi-Period Setting

“…In particular, new solutions arise based on observable performance measures and reinforced expectations over time. Prior experimental studies in accounting and economics have found that repeat interaction increases the potential for cooperative behavior, leading to superior outcomes for the principal and the agent (Schatzberg and Stevens 2008;Fisher et al 2008;Kuang and Moser 2009;Smith 2010). Further, agency theorists have long included the possibility of reputation building in multi-period settings (Baiman 1982(Baiman , 1990Lambert 2001).…”