Discussion of Trust or Reciprocity? The Effect of Controls on Other-Regarding Behavior

Transcription

1 Discussion of Trust or Reciprocity? The Effect of Controls on Other-Regarding Behavior Discussion by Nicole Cade and Sarah McVay

2 Bridging the gap

3 Controls Controls are any action a firm takes to influence the behavior of its employees and align their behavior with the interests of the firm (Jensen and Meckling 1976) Rewards, penalties, monitoring, restrictions

4 Prior research Q: How do controls affect behavior? A: It depends.

5 Prior research If most individuals would not undertake the principal s desired action absent intervention (hereafter participation) controls generally increase participation (but it needs to be a strong control). Paying taxes.

6 Prior research If most individuals would participate without the control, controls generally lower participation. Penalty of fining parents late for daycare pickup generally resulted in later arrival times. (Gneezy and Rustichini 2000) Disutility of arriving late was greater than the disutility of paying a fee.

7 Prior research Reward of paying for blood donations reduced participation among women. (Mellstrom and Johannesson 2008) Utility of doing a good deed was greater than the utility from the payment. Broadly speaking, controls inhibit the signaling value of being a good citizen, reducing incentives to go above and beyond. (Niehoff and Moorman 1993)

8 Prior research There is some disagreement as to how the muddying of the signal of being a good citizen affects beliefs about individuals. Although it is difficult to know whether they are undertaking the desired behavior because they are greedy (control-driven) or altruistic (would have done it anyway), there is some evidence the behavior is still valued (Coletti et al. 2005).

9 Coletti, Sedatole and Towry, 2005 Decision: Whether to contribute to a joint R&D project or to individual projects. Division manager had previously committed to upper management that they would devote a high level of resources to the joint project. Control: Periodically a consultant will assess contributions to the joint project; penalty might be in the form of reduced funding or lower bonuses.

10 Coletti, Sedatole and Towry, 2005 Agents maximize their expected utility. Coletti et al. then explore whether trust can be formed in presence of controls.

11 Coletti et al. s trust Coletti et al. define trustworthiness as an innate personal characteristic reflecting one s preference for upholding some social norm of behavior, regardless of economic incentives. (p. 481) They note that relevant social norms may include honesty, fairness, cooperation, commitment, reciprocity, accountability, etc. (footnote 3)

12 Coletti et al. and Trust Observer who can see both participation and control setting ranks division managers in control group as more trustworthy.

13 Coletti et al. and Trust Obvious underlying driver is cooperation (called mediators in the Experimental world) (+) Trustworthy = Control (+) Trustworthy = Cooperate (n.s.) (+) Trustworthy = Control + Cooperate So observers view those who cooperate as more trustworthy, and division managers cooperate more in the control setting.

14 Coletti et al. Experiment 2 (a repeated game) Maximizing E(U) = Low Coordination = High Coordination and Maximizing E(U) = High

15 Coletti et al. Experiment 2 Coletti et al. then explore the effect of trust on subsequent cooperation

16 Coletti et al. Experiment 2 Motivation for JDT: Reciprocity may provide an alternative explanation for the results To the extent that the positive effect of controls is due to reciprocity and not trust, the potential benefit of controls in non-interactive relationships is diminished. (bold added) Coletti et al. then explore the effect of trust on subsequent cooperation

17 What is Trust? JDT define trust as: risking one s own resources with the expectation that the risk will be rewarded by the trustee. (p. 7) Coletti et al. define trustworthiness as an innate personal characteristic reflecting one s preference for upholding honesty, fairness, reciprocity regardless of economic incentives. (p. 481 and footnote 3)

18 Bridging the gap

19 What is Reciprocity? JDT define reciprocity as Sacrificing one s own resources to reward another person s good behavior, with no expectation of return. (p. 7) Falk and Fischbacher (2006) note reciprocity means that people reward kind actions and punish unkind ones. Is it payback? Is it altruistic? It s not clear interaction is required for this definition

20 Contribution The goal of this study is to test the extent to which the effect of controls on other-regarding behavior is driven by trust and reciprocity. Trust? Reciprocity? Honesty? Fairness? Benevolence? Competence? Integrity?

21 Stage 1: Seven rounds of prisoner s dilemma with same partner (with control) Coordination and Maximizing E(U) = High

22 First-stage, round 1 (with controls) Observer 1 Cooperating maximizes my wealth Observer 2 Let s work together! Manager 1 Manager 2

23 First-stage, round 2 (with controls) What nice cooperation! Observer 1 Observer 2 Easy money I love coordinating! Manager 1 Manager 2

24 Stage 1: Seven rounds of prisoner s dilemma with same partner (no controls) Maximizing E(U) = Low Coordination = High

25 First-stage, round 1 (no controls) Observer 1 Sucker Observer 2 Let s work together! Manager 1 Manager 2

26 First-stage, round 2 (no controls) Observer 1 Observer 2 Sucker She ll get it right this time! Manager 1 Manager 2

27 First-stage, round 3 (no controls) Observer 1 She s heartless! Oh you poor thing Observer 2 Sucker This time for sure! Manager 1 Manager 2

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29 Second-stage Observer 1 can give Manager 1 up to $100. This transforms into $300 Manager 2 can give Manager 1 up to $100. This transforms into $300. Observer 1 and Manager 2 are asked how much they think Manager 1 will return to them (between zero and $300).

30 Second-stage = Investment Expected Return Observer 1 Observer 2 Manager 1 Manager 2

31 Second-stage = Investment Expected Return Observer 1 Observer 2 Trust + Reciprocity Manager 1 Manager 2

32 Second-stage = Investment Expected Return Observer 1 Observer 2 Trust + Reciprocity Manager 1 Manager 2 Manager2 Observer1 = Reciprocity

33 Reciprocity? JDT define reciprocity as Sacrificing one s own resources to reward another person s good behavior, with no expectation of return. (p. 7) Falk and Fischbacher (2006) note reciprocity means that people reward kind actions and punish unkind ones. Is it altruistic? Is it payback? It s not clear interaction is required for this definition

34 First-stage, round 3 (no controls) Observer 1 She s heartless! Oh you poor thing Observer 2 Sucker This time for sure! Manager 1 Manager 2

35 Second-stage = Investment Expected Return Observer 1 Observer 2 Trust + Reciprocity Manager 1 Manager 2 Manager2 Observer1 = Reciprocity?

36 Second-stage = Investment Expected Return Observer 1 Observer 2 Trust + Reciprocity Manager 1 Manager 2 Manager2 Observer1 = Reciprocity?

37 Trust Assumption

38 Suggestions Work on cementing the constructs and provide more support for the reasonableness of the underlying assumptions. Extend in other ways

39 Suggestions The authors do not consider whether there is a discount to cooperating with controls. Investment/ExpectedReturn (n.s.) (+) = Control + Cooperate (-) + Control Cooperate Does this differ across managers and observers?

40 Suggestions (n.s.) (+) Investment/ExpRet = Control + Cooperate (-) + Control Cooperate Currently Cooperate is the number of rounds in which they contributed high resources, but it should matter a lot what their partner contributed.

41 Suggestions It would be nice to have descriptive statistics on the underlying distribution of scores for each round, matched with partner behavior. Round Control No Control 1 HH HL LH LL HH HL LH LL 2 HH HL LH LL HH HL LH LL Aggregate HH HL LH LL HH HL LH LL

42 Suggestions Do some division managers in the no-control setting consistently cooperate? If so, are they matched with other cooperators or just continuously lose? Does a defector ever capitulate and cooperate? Perhaps from feelings of guilt?

43 Suggestions To add granularity to a within-control regression: Investment/ExpectedReturn = HH_Coop + LL_Coop + HL_Coop + LH_Coop Defecting in the control condition is inefficient. Contributing in the no-control when your partner has been defecting seems inefficient. Contributing in the no-control when your partner is cooperating is socially optimal (i.e., true cooperation). Is there any back-and-forth where managers are trying to coordinate but failing absent the control?

44 Other Extensions to Coletti et al. What if you don t tell them the audit has ended? What if you reduce the audit percent? How low can you go? What if you introduce a penalty instead of a reward?

45 Conclusion Very interesting area with a lot of possible extensions using the data already collected. The authors need to be careful not to mischaracterize prior research and need to do more to validate their key assumptions. Although I m less optimistic about separating trust and reciprocity, I hope we can learn about how individuals weight different patterns of behavior.

46 Thank you!