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Distrust - The Hidden Cost of Control

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  • Armin Falk
  • Michael Kosfeld

Abstract

We show experimentally that a principal's distrust in the voluntary performance of an agent has a negative impact on the agent's motivation to perform well. Before the agent chooses his performance, the principal in our experiment decides whether he wants to restrict the agents' choice set by implementing a minimum performance level for the agent. Since both parties have conflicting interests, restriction is optimal for the principal whenever the latter expects the agent to behave opportunistically. We find that most principals in our experiment do not restrict the agent's choice set but trust that the agent will perform well voluntarily. Principals who trust induce, on average, a higher performance and hence earn higher payoffs than principals who control. The reason is that most agents lower their performance as a response to the signal of distrust created by the principal's decision to limit their choice set. Our results shed new light on dysfunctional effects of explicit incentives as well as the puzzling incompleteness of many economic contracts.

Suggested Citation

  • Armin Falk & Michael Kosfeld, "undated". "Distrust - The Hidden Cost of Control," IEW - Working Papers 193, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:193
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    File URL: http://www.econ.uzh.ch/static/wp_iew/iewwp193.pdf
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    Cited by:

    1. Francis Kamarz (editor) & Joshua D. Angrist & David M. Blau & Armin Falk & Jean-Marc Robin & Christopher R. Taber, 2006. "How to do empirical economics," Investigaciones Economicas, Fundación SEPI, vol. 30(2), pages 179-206, May.
    2. Stéphane Hallegatte, 2005. "Accounting for Extreme Events in the Economic Assessment of Climate Change," Working Papers 2005.1, Fondazione Eni Enrico Mattei.
    3. Grund Christian & Harbring Christine, 2013. "Trust and Control at the Workplace: Evidence from Representative Samples of Employees in Europe," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(5-6), pages 619-637, October.
    4. Clara Graziano & Annalisa Luporini, 2012. "Ownership concentration, monitoring, and optimal board structure," Economics Bulletin, AccessEcon, vol. 32(4), pages 3333-3346.
    5. Zamagni, Stefano, 2006. "Responsabilita' Sociale delle Imprese e "Democratic Stakeholding"," AICCON Working Papers 28-2006, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
    6. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran A., 2008. "Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6068, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Jean Tirole & Roland Bénabou, 2006. "Incentives and Prosocial Behavior," American Economic Review, American Economic Association, vol. 96(5), pages 1652-1678, December.
    8. Armantier, Olivier & Boly, Amadou, 2011. "A controlled field experiment on corruption," European Economic Review, Elsevier, vol. 55(8), pages 1072-1082.
    9. Irlenbusch, Bernd & Sliwka, Dirk, 2005. "Incentives, Decision Frames, and Motivation Crowding Out – An Experimental Investigation," IZA Discussion Papers 1758, Institute of Labor Economics (IZA).
    10. Bruno Jossa, 2009. "Alchian And Demsetz'S Critique Of The Cooperative Firm Thirty‐Seven Years After," Metroeconomica, Wiley Blackwell, vol. 60(4), pages 686-714, November.
    11. Houser, Daniel & Xiao, Erte & McCabe, Kevin & Smith, Vernon, 2008. "When punishment fails: Research on sanctions, intentions and non-cooperation," Games and Economic Behavior, Elsevier, vol. 62(2), pages 509-532, March.
    12. Christophe Lemiére & Gaute Torsvik & Ottar Mæstad & Christopher H. Herbst & Kenneth L. Leonard, 2013. "Evaluating the Impact of Results-Based Financing on Health Worker Performance: Theory, Tools and Variables to Inform an Impact Evaluation," Health, Nutrition and Population (HNP) Discussion Paper Series 98269, The World Bank.
    13. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2012. "Rewarding carrots and crippling sticks: Eliciting employee preferences for the optimal incentive design," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1247-1265.
    14. Pedro Rey Biel, 2005. "Equilibrium Play and Best Response in Sequential Constant Sum Games," Experimental 0506004, University Library of Munich, Germany.
    15. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, vol. 97(3), pages 999-1012, June.
    16. Ichino, Andrea & Muehlheusser, Gerd, 2008. "How often should you open the door?: Optimal monitoring to screen heterogeneous agents," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 820-831, September.
    17. Rodriguez-Sickert, Carlos & Guzmán, Ricardo Andrés & Cárdenas, Juan Camilo, 2008. "Institutions influence preferences: Evidence from a common pool resource experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 215-227, July.
    18. Amadou Boly, 2011. "On the incentive effects of monitoring: evidence from the lab and the field," Experimental Economics, Springer;Economic Science Association, vol. 14(2), pages 241-253, May.
    19. Matteo Ploner, 2007. "Personal Autonomy in Trust-Based Interactions. An Experimental Analysis," CEEL Working Papers 0701, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    20. Marie-Noelle Albert & Jean-Pierre Perouma, 2017. "The Dialogue: an Essential Component to Consider “Organization as a Community of Persons”," Humanistic Management Journal, Springer, vol. 2(1), pages 37-55, October.
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    More about this item

    Keywords

    trust; distrust; motivation; principal-agent relationship; incentives; control; incomplete contracts;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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