The Hidden Costs of Not Using Discretionary Controls

41 Pages Posted: 11 Jan 2019

See all articles by Jeremy Douthit

Jeremy Douthit

University of Arizona - Dhaliwal-Reidy School of Accountancy

Jing Davis

Chapman University

Steven Schwartz

SUNY at Binghamton - School of Management

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: December 20, 2018

Abstract

This study investigates the effect of a principal’s choice on the availability of discretionary controls, where discretionary controls are defined as those not supported by enforceable explicit contracts. In contrast to prior findings on explicit controls, we find that agent reciprocity is not significantly less when principals choose a discretionary control than when they are exogenously available. That is, we find no hidden costs of discretionary control. We tentatively attribute this finding to agents viewing discretionary controls as less intrusive than explicit controls. Interestingly, we find that agent reciprocity is less when principals choose to forgo discretionary controls than when the discretionary controls are not available. One explanation for this result is that agents perceive that principals who turn down the option to have discretionary controls available place less value on agents’ norm-adhering behavior than other principals. These findings support the often-used managerial practice of using discretionary controls.

Keywords: Discretionary Control; Gift-Exchange; Motivational Crowding

Suggested Citation

Douthit, Jeremy and Davis, Jing and Schwartz, Steven and Young, Richard A., The Hidden Costs of Not Using Discretionary Controls (December 20, 2018). Available at SSRN: https://ssrn.com/abstract=3308632 or http://dx.doi.org/10.2139/ssrn.3308632

Jeremy Douthit

University of Arizona - Dhaliwal-Reidy School of Accountancy ( email )

Tucson, AZ 85721
United States

Jing Davis (Contact Author)

Chapman University ( email )

Orange, CA 92866
United States

Steven Schwartz

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-0889 (Phone)
614-292-2118 (Fax)

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