My Gift to You, Paid by Him: The Dark Side of Reciprocity in Hierarchical Organizations

• In Event: DSFI: Part II

Abstract

In organizations with a multi-level agency hierarchy (owners vs. managers vs. employees), managers often play dual roles: in the role as an agent for owners, managers allocate resources between owners and employees; in the role as a principal for employees, managers are affected by employees’ actions. We experimentally investigate whether managers use decision rights in the former role to induce employees to act in their interest in the latter role, negatively affecting owners’ overall efficiency. We predict and find that managers allocate more resources to employees (at the cost of owners) when the allocation decision is observable to employees than when it is unobservable, despite being given an incentive that increases with owners’ return. Further, managers allocate more resources to employees when employees can communicate their desired outcome to managers than when communication is not available. We also find that managers’ intention to exchange gifts with employees underlies these observed results. The implications of our findings for management control theory and practice are discussed.

Authors

• Di Yang, Georgia Institute of Technology

• Jason Kuang, Georgia Institute of Technology