Reducing partner risk: the effect of feedback timing and incentives

Firms’ partners often face a wide range of risks and may experience detrimental effects when these firms do not meet certain targets. In this study, we examine how timing of feedback about target outcomes and the presence of incentives for managers to meet these targets influence managers’ effort and their partners’ willingness to collaborate. We test our hypotheses in a representative ESG setting using a multi-period investment game with a 2 × 2 design where a collaborating partner only realises a return on her investment if the manager of the firm with whom she contracts meets an ESG norm. The risk of not meeting this norm decreases when managers provide costly effort. While results show no significant effect of feedback timing on managers’ effort in the absence of incentives, providing incentives to the manager may be detrimental for effort provision when target outcomes become available after a short time period. We also find that in the absence of incentives, firms’ partners invest more when outcomes become available after a short time period than after a longer time period. Further, when outcomes become available after a short time period, partners invest less when managers receive incentives compared to when managers receive no incentives.