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Masters of the universe: How power and accountability influence self-serving decisions under moral hazard

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Author Info

  • Marko Pitesa

    ()
    (GEM - Grenoble Ecole de Management - Grenoble École de Management (GEM))

  • Stefan Thau

    ()
    (LBS - London Business School - London Business School)

Registered author(s):

    Abstract

    This paper provides an answer to the question of why agents make self-serving decisions under moral hazard and how their self-serving decisions can be kept in check through institutional arrangements. Our theoretical model predicts that the agents' power and the manner in which they are held accountable jointly determine their propensity to make self-serving decisions. We test our theory in the context of financial investment decisions made under moral hazard using others' funds. Across three studies, using different decision-making tasks, different manipulations of power and accountability, and different samples, we show that agents' power makes them more likely to behave in a self-serving manner under moral hazard, but only when the appropriate accountability mechanisms are not in place. Specifically, we distinguish between outcome and procedural accountability and show that holding agents accountable for their decision-making procedure reduces the level of self-serving decisions under moral hazard and also curbs the negative consequences of power. Implications for decisions under moral hazard, the psychology of power, and the accountability literature are discussed.

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    File URL: http://hal.grenoble-em.com/docs/00/81/45/65/PDF/pitesa_thau_JAP_2013.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Grenoble Ecole de Management (Post-Print) with number hal-00814565.

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    Date of creation: 04 Feb 2013
    Date of revision:
    Publication status: Published, Journal of Applied Psychology, 2013, 98, 3, 550-558
    Handle: RePEc:hal:gemptp:hal-00814565

    Note: View the original document on HAL open archive server: http://hal.grenoble-em.com/hal-00814565
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: moral hazard; accountability; power; investment decisions; unethical behavior;

    This paper has been announced in the following NEP Reports:

    References

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    1. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, 06.
    2. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    3. Ren� M. Stulz, 2007. "Hedge Funds: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 175-194, Spring.
    4. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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    Cited by:
    1. Lanaj, Klodiana & Johnson, Russell E. & Barnes, Christopher M., 2014. "Beginning the workday yet already depleted? Consequences of late-night smartphone use and sleep," Organizational Behavior and Human Decision Processes, Elsevier, vol. 124(1), pages 11-23.
    2. 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.

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