Reciprocity and Self-Interest in Performance Reporting: An Experimental Examination of Fairness, Equity, and Deception

Abstract

This study reports the results of an experiment that examined how preferences for fairness, equity, and wealth affect individual performance reporting on contracted work tasks. Classical economic theory and anecdotal evidence from recent accounting scandals suggest that people engage in self-interested deception in order to benefit economically. However, recent research in accounting finds greater than expected levels of honesty in managerial reporting. This study provides evidence that pure economic self-interest may not necessarily explain actual levels of deception in performance reporting. I rely upon predictions from fairness theory and equity theory to empirically examine potential alternative predictions for when deceptive performance reporting may occur. I first hypothesize that contractual fairness between an employer and employee explains observed patterns of deception better than pure economic self-interest. Next, I predict that equity concerns between an employee and co-workers will also affect actual levels of deceptive performance reporting. I observe a systematic relationship between manipulated variables, fairness and relative compensation equity, and deception. I conclude that reciprocal preferences help explain why individuals may choose to report truthfully and thus forego economic gain in an unmonitored environment in which deceptive reporting is both economically advantageous and seemingly costless. I show that imposing challenging performance standards and contracting with linear reward schemes, which regardless of compensation levels are perceived as more fair due to the incremental relationship between output and reward, is an effective mechanism for concurrently motivating effort and proactively reducing deception. I provide empirical evidence that individuals' decisions to engage in deceptive performance reporting is motivated more by reactions to perceived mistreatment, causing reciprocal behaviors, than simple economic self-interest alone.