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

Author

Listed:
  • Marko Pitesa

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

  • Stefan Thau

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

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.

Suggested Citation

  • Marko Pitesa & Stefan Thau, 2013. "Masters of the universe: How power and accountability influence self-serving decisions under moral hazard," Grenoble Ecole de Management (Post-Print) hal-00814565, HAL.
  • Handle: RePEc:hal:gemptp:hal-00814565
    DOI: 10.1037/a0031697
    Note: View the original document on HAL open archive server: http://hal.grenoble-em.com/hal-00814565
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    File URL: http://hal.grenoble-em.com/hal-00814565/document
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    References listed on IDEAS

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    1. René M. Stulz, 2007. "Hedge Funds: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 175-194, Spring.
    2. repec:cup:apsrev:v:99:y:2005:i:01:p:29-43_05 is not listed on IDEAS
    3. 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, June.
    4. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
    5. 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.
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    Citations

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    Cited by:

    1. Alexandra Rausch & Alexander Brauneis, 2015. "It’s about how the task is set: the inclusion–exclusion effect and accountability in preprocessing management information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 313-344, June.
    2. Desai, Sreedhari D. & Kouchaki, Maryam, 2015. "Work-report formats and overbilling: How unit-reporting vs. cost-reporting increases accountability and decreases overbilling," Organizational Behavior and Human Decision Processes, Elsevier, vol. 130(C), pages 79-88.
    3. repec:jdm:journl:v:12:y:2017:i:6:p:610-626 is not listed on IDEAS
    4. Bixter, Michael T. & Luhmann, Christian C., 2014. "Shared losses reduce sensitivity to risk: A laboratory study of moral hazard," Journal of Economic Psychology, Elsevier, vol. 42(C), pages 63-73.
    5. Ajit Nayak, 2016. "Wisdom and the Tragic Question: Moral Learning and Emotional Perception in Leadership and Organisations," Journal of Business Ethics, Springer, vol. 137(1), pages 1-13, August.
    6. Melanie de Waal & Floor Rink & Janka Stoker, 2015. "How internal and external supervisors influence employees' self-serving decisions," DNB Working Papers 464, Netherlands Central Bank, Research Department.
    7. repec:eee:jobhdp:v:144:y:2018:i:c:p:171-186 is not listed on IDEAS
    8. 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.
    9. repec:eee:jobhdp:v:142:y:2017:i:c:p:45-57 is not listed on IDEAS
    10. repec:kap:jbuset:v:144:y:2017:i:2:d:10.1007_s10551-015-2780-4 is not listed on IDEAS
    11. 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.

    More about this item

    Keywords

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

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