Do You Fear Your (Heterogeneous) Peers? An Experimental Investigation About Peer-Induced Fairness Concerns in a Capital Budgeting Setting
August 15, 2011
AAA 2012 Management Accounting Section (MAS) Meeting Paper
This study examines reporting honesty when private information of subordinates is imperfect or when subordinates only can obtain precise information at a cost. Imperfect information has the potential to decrease honesty as such information helps to self-justify high cost reports and thus weakens the power of distributional fairness concerns. I hypothesize that increasing the superior’s span of control, which makes peer-induced fairness concerns salient, induces more honest reporting when the subordinate’s private information is imperfect. Peer-induced fairness concerns capture the notion that subordinates conceptualize the honesty of a cost report vis-à-vis the cost reports of the other subordinates and are only activated under a high span of control. I also hypothesize that the salience of peer-induced fairness concerns under a high span of control will increase the willingness to pay for precise information and limit the dishonesty of subordinates that do not invest in precise information. The results of an experiment confirm these hypotheses. This study contributes to the literature by investigating reporting honesty when private information is imperfect and by showing the importance of peer-induced fairness concerns when distributional fairness concerns are weakened. I also show that an expanded span of control can serve as a substitute for contracting and monitoring when the firm can benefit from actions that are costly for the subordinate.
Number of Pages in PDF File: 45
Keywords: budgeting, distributional fairness concerns, peer-induced fairness concerns, span of control
JEL Classification: M41
Date posted: August 15, 2011