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Title: Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts
Authors: Cardinaels, Eddy
Yin, Huaxiang
Keywords: Social norms
Incentive contract
Information leakage effect
Issue Date: 2015
Source: Cardinaels, E., & Yin, H. (2015). Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts. Journal of Accounting Research, 53(5), 985-1015.
Series/Report no.: Journal of Accounting Research
Abstract: Principals make decisions on various issues, ranging from contract design to control system implementation. Few studies examine the principal's active role in these decisions. We experimentally investigate this role by studying how a principal's choice of an incentive contract that may discourage misrepresentation, compared to a fixed-salary contract, affects the honesty of his or her agents’ cost reporting. Results show that, besides an incentive effect and a principal trust effect, the active choice for incentives produces a negative “information leakage” effect. When principals use incentives, their choices not only incentivize truthful reporting and signal distrust, but they also leak important information about the social norm, namely, that other agents are likely to report dishonestly. Agents conform to this social norm by misrepresenting cost information more. Our results have important practical implications. Managers must recognize that their decisions can leak information to their agents, which may produce unanticipated consequences for the social norms of the organization.
ISSN: 0021-8456
DOI: 10.1111/1475-679X.12093
Schools: Nanyang Business School 
Rights: © 2015 Accounting Research Center. This is the author created version of a work that has been peer reviewed and accepted for publication in Journal of Accounting Research, published by University of Chicago on behalf of Accounting Research Center. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document.  The published version is available at: [].
Fulltext Permission: open
Fulltext Availability: With Fulltext
Appears in Collections:NBS Journal Articles

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