Do Good Intentions Pay Off? Employee Responses to Well-Intended Actions with Risky Outcomes

Abstract

How does a subordinate react to the superior’s well-intended action when it is not certain that it will produce the intended outcome? The risk associated with the outcome creates moral wiggle room and thus poses a threat to the gift exchange between the superior and the subordinate. In a laboratory experiment, we first find that subordinates continue to reciprocate if the outcome risk is high. Second, however, subordinates’ response to a well-intended action that increases outcome risk depends on their inequality aversion. Weakly inequality-averse subordinates repay a kind action with a kind reaction if it decreases, but not if it increases, their outcome risk, whereas strongly inequality-averse subordinates react alike in both cases. Hence, a well-intended action is less worthwhile for subordinates if it increases than if it decreases outcome risk.

Keywords:

• Gift-exchange game
• Inequality aversion
• Reciprocity
• Risk

JEL classifications:

• M41
• M52
• C91
• D91

Acknowledgement

We thank our associate editor Victor Maas, our two anonymous reviewers, Michael Majerczyk (discussant), Alwine Mohnen, Steve Kachelmeier, and Michael Williamson, as well as seminar participants at the annual meeting of the American Accounting Association in 2020, the midyear meeting of the Management Accounting Section of the American Accounting Association in 2021, and the annual congress of the European Accounting Association in 2021 for helpful comments. We are particularly indebted to Dominik Doll, who contributed much to this study in the early stage.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data Availability

The data are available from the authors upon request.

Notes

1 We use ‘response’ to refer to any behavioral reaction, whether it is driven by reciprocity, inequality aversion, or other motives. Likewise, ‘fair’ behavior can be driven by inequality aversion (a preference for an equal, or ‘fair,’ distribution of payoffs), but also by reciprocity.

2 We take a similar approach as Charness and Levine (2007) for our test of H1.

3 The increase in expected utility is the same, too, regardless of the subordinate’s utility function and thus risk aversion. Let U denote the subordinate’s utility function. His payoff with bonus is 50 thalers; without, 40. For an ex-ante probability of 25 percent, the gain in expected utility from the superior’s support is given by 0.25[U(50) − U(40)] = [0.5U(40) + 0.5U(50)] − [0.75U(40) + 0.25U(50)]. For an ex-ante probability of 50 percent, it also evaluates to 0.25[U(50) − U(40)] = [0.25U(40) + 0.75U(50)] − [0.5U(40) + 0.5U(50)].

Alternatively, we might want to keep the expected value of the compensation constant while the ex-ante probability varies. We would then need to adjust the subordinate’s fixed compensation (e.g., reduce it to 37.5 thalers if the ex-ante probability is 50 percent). In this case, however, the increase in expected utility, 0.25[U(47.5) − U(42.5)], is no longer independent of the subordinate’s utility function and thus risk aversion. Our experiment does not address the question of how subordinates would respond in such a case.

4 This setting does not fully rule out an effect of inequality aversion either. The superior incurs a cost to increase the probability from 25 to 50 percent, which she does not if it the probability has been 50 from the beginning. Consequently, inequality is larger in the former case. A robustness test shows, however, that inequality aversion cannot explain subordinates’ response.

Specifically, the difference between the subordinate’s expected payoff and the superior’s payoff adjusts the subordinate’s effort for inequality. Regressing this difference on the superior’s decision to support the subordinate and the subordinate’s inequality aversion, the effect of the decision, which motivates the subordinate to reciprocate, is significantly negative. Hence, when returning the superior’s gift, subordinates overcompensate the cost of the gift, increasing effort beyond what inequality aversion could possibly explain.

5 We compare the differences between Bars 1 and 3 and between Bars 2 and 4 in Panel B of Figure 2. In terms of coefficients, Bar 1 is 0.313 tall (the intercept); Bar 3, 0.315 ≈ 0.313 + 0.003 (up to a rounding error); Bar 2, 0.329 = 0.313 + 0.016; Bar 4, 0.561 ≈ 0.313 + 0.016 + 0.230 (up to a rounding error). Taking the difference between the differences, we are left with the coefficient on the interaction term, 0.230.

6 An alternative explanation for H2a would be that subordinates with weak inequality aversion are more risk-averse, on average, than strongly inequality-averse subordinates. They would then retain effort if their own payoff is at risk, unlike strongly inequality-averse subordinates.

First, however, H2b argues against this explanation. The subordinate’s gain of expected utility from the superior’s well-intended action is the same, whether it increases the probability of the bonus from 25 to 50 or from 50 to 75 percent, regardless of his risk aversion (see fn. 3). If risk aversion explains the (non-)response of weakly inequality-averse subordinates when the superior increases the probability from 25 to 50 percent, we should see the same (non-)response when she increases it from 50 to 75 percent. Second, Müller and Rau (2019), who measure both inequality aversion and risk aversion, find no correlation between these (p. 83).

7 Depending on the condition, the probability is either 25 percent or 50 percent. The superior can increase it by 25 percentage points—i.e., from 25 to 50 or from 50 to 75 percent.

8 The formulae and the effort–cost table are displayed again to the subordinate and the superior when they make their decisions.

9 The correct answers are as follows. Question 1: 3, 4, 2, and 1. Question 2: 1. Question 3: 1. Question 4: 25 or 50, depending on the treatment. Question 5: 50 or 75, depending on the treatment. Question 6: C. (The company makes the decision.) Question 7: 30. Question 8: 40. Question 9: 30. Question 10: 40. (Questions 7–10 illustrate the superior’s compensation for any combination of decisions.) Question 11: 44. Question 12: 44. Question 13: 34. Question 14: 34. (Questions 11–14 illustrate the subordinate’s compensation, paralleling Questions 7–10. The examples also show that a level of effort of 0.5 does not result in an equal distribution of payoffs.)

Additional information

Funding

This work was supported by Technical University of Munich.