The Effect of Performance-Based Incentive Contracts on System 1 and System 2 Processing in Affective Decision Contexts: fMRI and Behavioral Evidence
Anne M. Farrell
Miami University of Ohio - Farmer School of Business - Department of Accountancy
Joshua O. Goh
National Institutes on Aging
Brian J. White
University of Texas at Austin - Department of Accounting
June 9, 2014
Accounting Review, Forthcoming
Managers may rely on emotional reactions to a setting to the detriment of economic considerations (“System 1 processing”), resulting in decisions that are costly for firms. While economic theory prescribes performance-based incentives to align goals and induce effort, psychology theory suggests that the salience of emotions is difficult to overcome without also inducing more deliberate consideration of both emotional and economic factors (“System 2 processing”). We link these perspectives by investigating whether performance-based incentives mitigate the costly influence of emotion by inducing more System 2 processing. Using functional magnetic resonance imaging and traditional experiments, we investigate managers’ brain activity and choices under fixed wage and performance-based contracts. Under both, brain regions associated with System 1 processing are more active when emotion is present. Relative to fixed wage contracts, performance-based contracts induce System 2 processing in emotional contexts beyond that observed absent emotion, and decrease the proportion of economically costly choices.
Number of Pages in PDF File: 55
Keywords: Performance-based incentives, affect, dual process models, knowledge accessibility, System 1 and System 2 processing, fMRIAccepted Paper Series
Date posted: July 18, 2012 ; Last revised: June 10, 2014
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