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The hidden costs of control revisited: Should a sanctioning policy be announced in advance?
Author(s) -
Klempt Charlotte,
Pull Kerstin
Publication year - 2018
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.2877
Subject(s) - sanctions , principal (computer security) , incentive , crowding out , control (management) , compliance (psychology) , microeconomics , law and economics , crowding , deterrence theory , economics , principal–agent problem , business , public economics , law , social psychology , computer security , political science , monetary economics , psychology , computer science , finance , cognitive psychology , management , corporate governance
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.