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The effects of incentive contract types and contract components on honesty in managerial reporting
Hung - Chao Yu,
National Chengchi University
ABSTRACT. This paper reports the results of two experiments designed to examine the effects of incentive contract types and contract components on manager’s honesty in managerial reporting and firm’s profits. The experimental results reveal three important findings. First, incentive contract types significantly affect the degree of manager’s wealth-maximizing reporting. More importantly, the tradeoff of preferences between honesty and wealth is influenced by subjects’ fairness consideration of firm’s profits relative to their own wealth. Second, I experimentally propose and demonstrate that two contract components, the bonus-sharing scheme and the determination of performance standard, have significant effects on manager’s honest reporting behavior and firm’s profits. Finally, reciprocity and the determination of the performance standard seem to be the key forces affecting manager’s reporting behavior. Distributional fairness may not to play a role to manager’s honest reporting decisions.
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