Motivating Truthful Upward Communication of Private Information for Resource Allocation in a Decentralized Firm : A Test of Alternate Control Mechanisms

Truthful subordinate communication of private information is important to effective resource allocation. Analytical research has proposed mechanisms to attain this objective, yet few instances of their adoption have been reported. Instead, real world control mechanisms tend to be much simpler than those proposed by theoretical research. Empirical evidence which helps to identify the reasons for this divergence between theory and practice can contribute to the advancement of both. This experimental study tested five control mechanisms' effects on subordinates' communication truthfulness and the attendant firm loss from suboptimal resource allocations. It found that mechanisms proposed by theoretical research do reduce subordinate misrepresentations and their attendant firm loss. However, superiors who used a combination of simple controls, and who could exercise subjective judgment relating to their subordinates and their proposals, were able to equal the truth induction performance of the most effective analytically-derived mechanism. This performance, however, was not associated with a lower level of firm loss. Instead, the least amount of firm loss was produced by one of the analytical-derived incentive schemes. Another finding was that none of the mechanisms tested -- either from theory or practice -- was able to eliminate subordinate misrepresentations. Together, these results suggest that there is room for further development of both theory and practice. Theoretical research can benefit from considering the joint effects of multiple controls and incorporating more of the factors (e.g., learning, interpersonal relations, subjective judgments) that are operative in multi-period superior-subordinate relationships. There is also potential to enhance practice by trying out more of the mechanisms developed by analytical research