The Dual Role of Leadership in Shaping Organizational Transparency

Abstract

We examine whether and how leaders shape fraudulent behaviors within their organization. We use a lab experiment where subjects—randomly assigned the role of leaders or workers—are asked to privately roll a die and report the outcome, with higher reported outcomes corresponding to higher payoffs. Before rolling the die, they can choose how to report the outcome, by either a computer draw or a self-reported die roll. Self-reporting allows for profitable, undetectable earnings manipulation. We vary the leaders’ ability to choose the reporting system, and punish or reward workers for their reporting system choices. Our results indicate that workers are more likely to choose computer reporting when their leaders voluntarily do so, and can punish or reward. Even workers who choose self-reporting reporting tend to cheat less when their leaders choose computer reporting. However, most leaders do not opt for computer reporting in the first place: they frequently choose self-reporting and punish workers who rather choose computer reporting. Collectively, our results reveal a dual role of leaders in fostering an ethical climate in their organization: they can affect workers’ reporting system choices, but most of the times this exacerbates—rather than fixes—fraudulent behaviors.