Do Cross-Cultural Differences Affect Interpretations of Social Norms in Contract Choices? Evidence from a Dyadic Experiment Across Two Countries

• In Event: 4.03 Teamwork and Collaboration

Abstract

Global practices such as offshoring and expatriation of employees increase cross-cultural interactions within firms. In this paper, we investigate the effect of cross-cultural differences on the interpretation of social norms in contract choices. In our experiment, principal and agent participants interacted anonymously in real-time either in the same country or across two countries of high cultural difference. Principals chose a hiring contract (either with or without a signing bonus) for agents who, in return, chose their effort levels. Applying insights from social norm activation theory, we predict that high cultural differences will create ambiguity about the intentions and expectations of contracting parties, and therefore will reduce the interpretation of a bonus contract as a signal of trust. Consistently, we find that US agents exert substantially less effort when offered a signing bonus by a principal from a different culture than a similar culture. In addition, we find that US principals interacting with agents from a different culture suffer lower firm efficiency despite their attempts to motivate trustworthy behavior by offering bonuses more often than principals interacting with agents from a similar culture. However, our evidence reveals that cultural intelligence of contracting parties, which is the ability to successfully adapt to new cultural contexts, moderates the effect of high cultural difference. Specifically, US agents and principals who possess lower levels of cultural intelligence are more likely to reduce firm efficiency in a high cultural difference setting. Implications to theory and practice are discussed.

Authors

• Heba Yousef M. Abdel-Rahim, University of Toledo

• Melanie Lorenz, Florida Atlantic University

• Angie M Abdel Zaher, The American University in Cairo