Abstract:In the absence of incentive-compatible control mechanisms, subordinate managers may misrepresent private information to advance their self-interests at the expense of the firm. Analytical research has proposed incentive mechanisms to motivate truthful upward communication of private information. Yet incentive mechanisms observed in practice seldom are as complex as those proposed by theoretical research. This study contributes evidence that may help to explain this divergence between theory and practice, and for identifying potential directions for the further development of both. In a laboratory experiment, four control mechanisms--two suggested by analytical research, and two proxying for practice--were tested. Both analytically derived mechanisms were found to reduce subordinate misrepresentations relative to the reportedly common linear profit-sharing arrangement. However, superiors who were allowed to use costly and imperfect audits, and who could exercise subjective judgment, outperformed all of the other mechanisms at inducing truth-telling, though this superior truth induction did not translate into a significantly lower level of firm losses from suboptimal project selections. Results also indicated that none of the mechanisms tested was able to eradicate subordinate misrepresentations and the profit losses that they induced. Together, these findings provide a possible explanation for the analytically derived mechanisms' lack of real-world adoption. Further, they suggest ways for both theory and practice to advance through more extensive cross-fertilization. [ABSTRACT FROM AUTHOR]

　　Subjects: incentives in industry; resource allocation; producer cooperatives; profit-sharing; resource management; feasibility studies

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