An Experimental Study of Endogenous Discretionary Controls on Employee Effort
European Accounting Review, forthcoming
48 Pages Posted: 13 Apr 2022
Date Written: March 17, 2022
Discretionary controls are controls that can be applied at the ex post discretion of the superior rather than being supported by pre-committed enforceable contracts. This study examines employees’ effort levels when a discretionary control is endogenously present (chosen by the superior) relative to when it is exogenously present (assigned by the experimenters). Results from our gift-exchange experiment regarding superiors’ choice of a discretionary control run counter to prior research on superiors’ choice to use pre-committed controls in two important ways. First, we find employee effort is unaffected by the superior’s choice of a discretionary control relative to when it is exogenous. That is, the intentional choice of a discretionary control does not seem to be resented by the employee. Second, we find employee effort is lower when superiors choose not to have a discretionary control present relative to when it is exogenously unavailable. That is, we not only find no reward to forgoing a discretionary control, but rather a cost to not choosing a discretionary control. In sum, our results support the prevalence of discretionary controls in practice.
Keywords: Discretionary Controls, Endogenous Controls, Gift-Exchange
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