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The hidden costs of control revisited: Should a sanctioning policy be announced in advance?

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  • Charlotte Klempt
  • Kerstin Pull

Abstract

Sanctions are widely used to enhance compliance in principal agent relationships. Although there is ample evidence confirming the predicted positive incentive effect of sanctions, it has also been shown that imposing sanctions may reduce compliance by crowding out intrinsic motivation. We add to the literature on the hidden costs of control by showing that these costs are restricted to situations where the principal actively chooses to sanction low performance and where this choice is known to the agent. In such a situation, the principal's commitment to sanction low performance might indicate that she or he is a distrustful “type†and hence conveys a negative signal. To the contrary, if (a) an agent is not informed about whether low performance will be sanctioned or if (b) the computer determines whether low performance will be sanctioned, the principal's “type†is not revealed, and we find no evidence of crowding out.

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  • Charlotte Klempt & Kerstin Pull, 2018. "The hidden costs of control revisited: Should a sanctioning policy be announced in advance?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(2), pages 158-170, March.
    • Handle: RePEc:wly:mgtdec:v:39:y:2018:i:2:p:158-170
    DOI: 10.1002/mde.2877
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    1. Akbaş, Merve & Ariely, Dan & Yuksel, Sevgi, 2019. "When is inequality fair? An experiment on the effect of procedural justice and agency," Journal of Economic Behavior & Organization, Elsevier, vol. 161(C), pages 114-127.

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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