The Hidden Costs of Not Using Discretionary Control

Abstract

This study investigates a principal’s choice to use discretionary controls, where discretionary controls are defined as those not supported by enforceable explicit contracts. Previous studies have found that a principal’s choice to use explicit controls, those backed by a formal contract, is associated with less prosocial behavior than if the controls are exogenously assigned. In contrast, we find that agent effort is not significantly affected by a principal’s choice to make discretionary controls available. We tentatively attribute this finding to agents not viewing discretionary controls as being as intrusive as explicit controls. We also find that agent effort is lower when principals choose not to have the discretionary controls available than when the discretionary controls are not allowed. One explanation consistent with this latter result is agents perceive that principals who turn down the option to make discretionary controls available do so because they do not value norm-adhering behavior by agents as much as do typical principals.

Keywords: Discretionary Control; Gift-Exchange; Motivational Crowding