Vicarious Learning Under Implicit Contracts

Posted: 13 Jul 2013 Last revised: 24 Sep 2015

See all articles by Willie Choi

Willie Choi

University of Wisconsin - Madison

Gary Hecht

University of Illinois at Urbana-Champaign

Ivo Tafkov

Georgia State University

Kristy L. Towry

Emory University

Date Written: September 21, 2015

Abstract

Employee contracts often allow for managerial discretion, such that the manager decides after observing an employee’s performance how that employee will be rewarded or penalized. Importantly, the effects of such evaluation outcomes can extend beyond the employee(s) directly affected, because such outcomes can be observed by other employees within the firm. The net effect of such vicarious learning as an indirect control depends on the inferences employees make after observing a peer’s evaluation outcome. In this study, we use an experiment to investigate whether the inferences observer-employees make about how managers evaluate and reward employee behavior depend on whether the valence of the observed outcome is positive or negative. Using the setting of a strategic performance measurement system, we test and find support for a causal model, in which the valence of the observed outcome influences observer-employees’ inferences and subsequent behavioral focus via their psychological distance from, and their construal of, the observed outcome. Our results suggest that how observer-employees respond after observing a peer employee’s evaluation outcome is asymmetric. Specifically, when contemplating their own behavior, employees who observe positive outcomes focus on the performance measures within the strategic performance measurement system, whereas those who observe negative outcomes focus on the underlying strategic construct.

Keywords: vicarious learning, strategic performance measurement systems, psychological distance, construal level theory

Suggested Citation

Choi, Jongwoon and Hecht, Gary and Tafkov, Ivo and Towry, Kristy L., Vicarious Learning Under Implicit Contracts (September 21, 2015). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2293142 or http://dx.doi.org/10.2139/ssrn.2293142

Jongwoon Choi (Contact Author)

University of Wisconsin - Madison ( email )

Wisconsin School of Business
975 University Avenue
Madison, WI 53706
United States

Gary Hecht

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Ivo Tafkov

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Kristy L. Towry

Emory University ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-4895 (Phone)

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