Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/145904 
Year of Publication: 
2016
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Experimental Economics: Agency Problems No. A05-V3
Publisher: 
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft, Kiel und Hamburg
Abstract: 
Capital rationing and reporting are often combined to allocate resources in firms. Trust in managers' honest reports and distrustful control create an interesting tension. How do managers respond to this ambivalence of trust and control? We develop an analytical model to predict, first, that managers reciprocate distrust; they misreport heavily so as to sabotage profitable investments. Second, reporting reduces in turn sabotage because managers are reluctant to lie. Third, honesty spills over, in addition, to inhibit managers' reciprocity. Evidence from a laboratory experiment supports our predictions. Our study ties capital rationing and reporting to the psychological factors of reciprocity and honesty and helps us understand their effects in budgeting. From a managerial viewpoint, the value of reporting, even in combination with capital rationing, may be as interesting to see as how sabotage further exacerbates the underinvestment which is known to arise from capital rationing.
JEL: 
D03
G31
M41
Document Type: 
Conference Paper

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