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Carrot or Stick? Contract Frame and Use of Decision‐Influencing Information in a Principal‐Agent Setting

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  • JAMES R. FREDERICKSON
  • WILLIAM WALLER

Abstract

A fundamental management accounting issue is how to incorporate decision‐influencing information (e.g., an ex post state signal) into employment contracts. Our experiment examines the effects of contract framing on such information use in a principal‐agent setting. In each of 40 rounds, participants (as employer and worker) negotiate a contract that specifies pay depending on an ex post state signal. State‐signal pay is framed as either a bonus or a penalty over two groups. The results show that the bonus frame facilitates information use, because of worker loss aversion. Although both groups initially underweigh the state signal, the bonus group quickly converges toward the optimal weight, whereas the penalty group persistently underweighs the state signal.

Suggested Citation

  • James R. Frederickson & William Waller, 2005. "Carrot or Stick? Contract Frame and Use of Decision‐Influencing Information in a Principal‐Agent Setting," Journal of Accounting Research, Wiley Blackwell, vol. 43(5), pages 709-733, December.
    • Handle: RePEc:bla:joares:v:43:y:2005:i:5:p:709-733
    DOI: 10.1111/j.1475-679X.2005.00187.x
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    References listed on IDEAS

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    1. Luft, Joan, 1994. "Bonus and penalty incentives contract choice by employees," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 181-206, September.
    2. Sprinkle, Geoffrey B., 2003. "Perspectives on experimental research in managerial accounting," Accounting, Organizations and Society, Elsevier, vol. 28(2-3), pages 287-318.
    3. Levinthal, Daniel, 1988. "A survey of agency models of organizations," Journal of Economic Behavior & Organization, Elsevier, vol. 9(2), pages 153-185, March.
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    1. Lydia Chikumbi & Milan Scasny, "undated". "Does ‘price framing’ influence empirical estimates in Discrete Choice Experiments: The case study for the South African wine industry," Working Papers 878, Economic Research Southern Africa.
    2. W. Ekins & Andrew Brooks & Gregory Berns, 2014. "The neural correlates of contractual risk and penalty framing," Journal of Risk and Uncertainty, Springer, vol. 49(2), pages 125-140, October.
    3. Fisher, Joseph G. & Frederickson, James R. & Peffer, Sean A., 2006. "Budget negotiations in multi-period settings," Accounting, Organizations and Society, Elsevier, vol. 31(6), pages 511-528, August.
    4. Peecher, Mark E. & Solomon, Ira & Trotman, Ken T., 2013. "An accountability framework for financial statement auditors and related research questions," Accounting, Organizations and Society, Elsevier, vol. 38(8), pages 596-620.
    5. David A. Miller & Kareen Rozen, 2011. "Optimally Empty Promises and Endogenous Supervision," Cowles Foundation Discussion Papers 1823, Cowles Foundation for Research in Economics, Yale University, revised Jun 2012.
    6. Bethany Cooper & Michael Burton & Lin Crase, 2019. "Willingness to Pay to Avoid Water Restrictions in Australia Under a Changing Climate," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(3), pages 823-847, March.

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