Managing Identities in Multi-Level Organizations : The Joint Effect of Social Distance and Social Value Orientation on Budget Reporting

In multi-level organizations, BU employees create budgetary slack from which the entire business unit may benefit but doing so causes agency costs for the organization. Relying on social identity theory, we predict and find, in data gathered by means of an experiment, that shortening the social distance between the owner and BU employees reduces budgetary slack among the prosocial BU employees by decreasing reported costs and increasing the frequency of owner-favoring reports. A shortened social distance from the owner has, however, little impact on the reporting behavior of proself BU employees. Consistent with our theory, we find that the interactive effect of social distance and social value orientation on budgetary slack is mediated by BU employees' identification with the organization relative to the business unit. Our study offers novel insights on a potential role and a boundary condition of shortening the social distance from lower-level employees, which is an increasingly popular informal control practice, for shaping identity formation and reducing agency costs in multi-level organizations