Does Monitoring Affect the Agent’s Preference for Honesty?

• In Event: Fraud Characteristics

Abstract

Trust and reciprocity have been widely studied in the economics literature. One robust conclusion from this research is that when individuals are trusted, they reciprocate with trustworthy behavior (e.g., Fehr and Gächter 1998). In contrast, research on monitoring and surveillance has shown that individuals view monitoring as a signal of distrust (Cialdini 1996; Falk and Kosfeld 2006; Frey 1993). In a work environment, the signal of distrust may lower the agent’s internal motivation to treat the principal fairly and increase the agent’s ability to rationalize dishonest behavior. We experimentally test this proposition by using a 3x2 experimental design where the participants are given a simple task, with a monetary reward based on performance, in one of three monitoring treatments—trust monitoring, human monitoring, or electronic monitoring—and in one of two outcome reporting regimes—self-report or verified. The results suggest that the monitoring environment does alter the agent’s preference for honesty. As hypothesized, individuals in the trust monitoring treatment reciprocated the trusting environment with honest behavior, while individuals in the human monitored and electronically monitored treatments showed a higher propensity toward dishonest behavior. Interestingly, less dishonesty was detected in the electronic monitoring treatment than the human monitored treatment. It is unclear if the lower dishonesty in the electronic monitoring treatment was caused by a decrease in the propensity to be dishonest, an increased fear of being exposed in the highly controlled environment, or some other reason. These results shed light on several important topics related to fraud prevention, internal controls, and the principal-agent relationship. They also raise interesting questions that can be addressed in future research.

Authors

• Brian K Laird, University of Memphis

• Charles D Bailey, University of Memphis