The Learning Effects of Monitoring
Harvard University - Accounting & Control Unit
Marc J Epstein
Rice University - Jesse H. Jones Graduate School of Business
Francisco de Asis Martinez-Jerez
University of Notre Dame - Department of Accountancy
June 20, 2011
The Accounting Review, Forthcoming
This paper investigates the relationship between monitoring, decision-making, and learning among lower level employees. We exploit a field-research setting in which business units vary in the ”tightness” with which they monitor employee decisions. We find that tighter monitoring gives rise to implicit incentives in the form of sharp increases in employee termination linked to ”excessive” use of decision-rights. Consistent with these implicit incentives, we find that employees in tightly monitored business units are less likely than their loosely monitored counterparts to: (1) use decision-rights; and (2) adjust for local information, including historical performance data, in their decisions. These decision-making patterns are associated with large and systematic differences in learning rates across business units. Learning is concentrated in business units with ”loose monitoring” and entirely absent in those with ”tight monitoring.” The results are consistent with an experimentation hypothesis in which tight monitoring of decisions leads to more control but less learning.
Number of Pages in PDF File: 44
Date posted: April 7, 2011 ; Last revised: June 21, 2011
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