What’s Fair Depends on What I Start With: The Influence of an Outcome Decision Aid and Initial Economic Position on Cost Reporting Misrepresentation

Abstract

Managers can use private information to strategically misrepresent costs and consume additional resources at the expense of the firm. However, past research has demonstrated that managers do not always fully misrepresent, thus failing to display economically rational decision making. This paper proposes that misrepresentation is a joint function of managers’ economic self interest and situation-dependent, fairness beliefs. Specifically, managers choose a culturally defensible fairness belief that maximizes self-interest, given an initial “advantaged” or “disadvantaged” economic position. Experimental results show that “advantaged” managers, i.e., those who receive more than do comparable managers misrepresent less, while “disadvantaged” managers, i.e., those who receive less than do comparable managers misrepresent more. An accounting decision aid that increases the salience of the consequences of the misrepresentation increases this effect. The results suggest that managers’ initial economic positions influence implemented fairness beliefs. In addition, increasing the salience of the effect of a managers’ decisions -- for example, through the use of an accounting system -- can increase or decrease misrepresentation, depending upon initial economic position.

Keywords: misrepresentation, decision aids, fairness, morality, social comparison

JEL Classification: M46, M40