The Crowding-Out Effect of Non-Financial Controls on Honest Reporting : An Experimental Examination Using the Superior’s Choice of an Information System

Researchers in accounting and economics have established that financial controls can diminish intrinsic motivation in the subordinate when they are intentionally imposed by the superior. We study the ability of a non-financial control to generate a similar crowding out effect on honest reporting in a participative budgeting setting. Because it has been shown to increase honest reporting, we use the superior's choice of an information system that reduces information asymmetry regarding the level of honesty in the budget. Consistent with prior results, we observe a strong positive effect on honest reporting when the information system is randomly assigned. When the information system is chosen by the superior, however, this positive effect is significantly reduced. We find that this reduction is attributable to the behavior of subordinates who measure high in norm sensitivity and thereby have intrinsic motivation for honest reporting. Further analysis suggests that both high and low norm sensitivity subordinates viewed the superior's choice of an information system as a signal of distrust, but only high norm sensitivity subordinates felt resentful and less obligated to report honestly as a result. The beliefs and behavior of superiors are also affected by their own social norm sensitivity. Our findings demonstrate that imposing a non-financial control can crowd out intrinsic motivation by signaling distrust to subordinates with high norm sensitivity. This study extends the crowding out effect found with financial controls to non-financial controls and provides evidence regarding the underlying theory behind this effect