June, 2015

Hidden Costs of Control Under Aligned Monetary Incentives

  • Jason Aimone

    Assistant Professor of Economics, Baylor University
  • Luigi Butera

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Several experimental studies have demonstrated the importance of non-monetary preferences in determining agents' response to control and delegation when monetary incentives between agents and principals are not aligned, but little is known about how such preferences influence the principle agent relationship when monetary incentives are aligned. Using a novel principal-agent-investor game, in which control takes the form of limiting the agent's reciprocity towards an investor, we show that non-monetary preferences also generate hidden costs when principal and agent's monetary incentives are aligned. Further, we show that these costs are mitigated when control is exercised using impersonal rules (i.e. restrictions are imposed ex-ante towards all agents), as opposed to personal control (i.e. restrictions are imposed directly towards an individual). Despite the relative benefits of impersonal control mechanisms, we find that principals are less likely to restrict agents' behavior when rules are impersonal. Overall, our results speak to the benefits of impersonal hierarchical rules whenever some degree of control is necessary within a team or a firm.

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