- In search of informed discretion: an experimental investigation of fairness and trust reciprocity
- Number of pages
- Amsterdam: Faculteit Economie en Bedrijfskunde
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
This paper investigates managerial discretion in compensation decisions in a team
(i.e., joint production) setting. Specifically, we investigate the conditions under which managers tasked with allocating a discretionary bonus pool are willing to incur a personal cost to obtain ex post non-contractible information about the individual effort levels of of team members. Using theory from behavioral economics that incorporates preferences for fairness into the manager’s utility function, we predict and demonstrate experimentally that managers’ willingness to incur such a cost increases as the team’s aggregate performance becomes less extreme (i.e., as the team’s aggregate performance becomes a more noisy measure of individual performance). Further, using theory that incorporates preferences for trust reciprocity into the manager’s utility function, we predict and demonstrate experimentally that managers’ willingness to incur the cost will be greater for relatively high vs. relatively low levels of aggregate performance. The study contributes to the existing literature on subjective performance evaluation by identifying how social preferences influence managers’ use of discretion in evaluation processes.
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.