The Effects of Control Systems on Cooperation under Environmental Risk

Prior research shows that formal controls such as explicit financial incentives and feedback about partner behavior (or equivalent mutual monitoring) help overcome relational risk in collaborative settings and increase cooperation. Environmental risk requires collaborators to infer cooperation from noisy outcomes, making attributions to their partner’s trustworthiness more difficult and cooperation harder to sustain. We investigate whether prior results on the effectiveness of (removed) formal controls hold under environmental risk. Importantly, we distinguish two common job designs (i.e., whether collaborators can mutually monitor cooperative actions or not) and isolate the effect of this variable from the effect of financial incentives. First, as a baseline with prior studies, we predict and find that mutual monitoring provides reliable information about partner behavior that mitigates difficulties for cooperation introduced by environmental risk. Second, financial incentives continue to have benefits for long-term cooperation (i.e., after their removal) not only when mutual monitoring is present, but also when mutual monitoring is absent and the difficulties for cooperation associated with environmental risk can take full effect. We provide supplemental evidence on the role of trust and perceived relational risk. Our results have implications for organizations’ control system design given environmental risk is inherent in business.