Difficult Cost Goals and Conflicting Honesty Incentives: The Influence of Decision Responsibility

Abstract

ABSTRACT We experimentally examine the effects of difficult goals and controllability on managerial honesty in a cost reporting setting. In our experiment, participants in the role of production managers make cost reporting decisions with economic incentives to over-report. We manipulate the presence of a difficult cost goal and whether managers perceive product costs as somewhat under their control. Our setting captures conflicting incentives of goal achievement and perquisite consumption, and we find that difficult cost goals do increase reporting honesty conditional on the presence of perceived ability to impact costs. Specifically, managers with decision responsibility report more honestly with a difficult cost goal than without, while managers without decision responsibility report with similar honesty with or without a cost goal. Our study provides evidence that decision right assignment moderates the honesty effects of difficult cost goals, with implications for firms' goal setting and organizational architecture choices.