Decision Intervention: The Effect of Assigned Social Status

Abstract:     
We examine whether individuals can defy their decision power if it is beneficial for them to do so. In an experiment we let principals make a decision whether to make their own investment decision, or to let their agent make that decision. While the principal can work out that the agent benefits from making the investment decision the principals would like him to make, we demonstrate that in more than 50 percent of the cases the principal rather loses money to assure that the decision she prefers is made than to let the agent make the same decision. This, however, is at odds with the real actions of the agents who select the course of actions preferred by the principal in almost 74% of the cases. We argue social status, derived from their decision authority, leads principals to prefer making their own decisions even if they have to incur a cost to follow their inclination. In addition we show that the label of 'CEO' or 'Divisional manager' does not prompt these individuals to assume this social status. It is the mere fact that they have the opportunity to make the investment decision that leads them to have low trust in the capabilities of the other party to make the same decision rendering a higher profit to all parties.

Number of Pages in PDF File: 39

Keywords: organization design, investment decisions, information asymmetry, social status

JEL Classification: D3, D81, D82, G31, L22, M4, M20, M21

working papers series