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The Hidden Costs of Not Using Discretionary Control

Sat, October 13, 7:30 to 8:30am, TBA

Abstract

This study uses a management control setting to investigate a principal’s choice to use costly discretionary controls, where discretionary controls are not supported by an enforceable explicit contract. Previous studies have found that a principal’s choice to use explicit controls, those backed by a formal contract, is associated with less prosocial behavior than if the control is assigned by an experimenter. This phenomenon is referred to as the “hidden costs of control”. Using parameters similar to explicit control studies, we find that agent effort is not significantly affected by a principal’s choice to make a discretionary control available. That is, there are no “hidden costs of discretionary control”. We tentatively attribute this finding to agents not viewing a discretionary control as being as intrusive as explicit control, but rather as a legitimate way for the principal to provide motivation. We also find that agent effort is lower when principals choose not to have the discretionary control available than when the discretionary control is not allowed. Thus, agents do not appear to interpret this choice as demonstrating trust, which might deserve reciprocation. One explanation consistent with this latter result is agents perceive principals who turn down the option to make discretionary control available as not valuing norm-adhering behavior by agents as much as typical principals.

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