ABSTRACT Many organizations offer profit sharing plans to motivate increased effort and goal congruence. However, an unintended consequence of such plans may be to reduce honesty in managerial reporting. We investigate two commonly observed profit sharing plans (individual and pooled) in a laboratory experiment where multiple agents with private cost information submit budget requests to an employer. Consistent with our prediction based on crowding theory, our findings suggest that honesty is reduced in the presence of an individual profit sharing plan. However, when a pooled profit sharing plan is used, the adverse effects on honesty are partially mitigated. Our results suggest that an unintended consequence of profit sharing (decreased honesty) can be mitigated through interdependency from pooled plans. The results have practical implications, given that organizations have flexibility in establishing both the size and scope of their profit sharing plans. Our study also contributes to our understanding of reporting behavior, particularly in multi‐agent settings.

ABSTRACT This study examines the benefits of employee involvement in feedback system design for cooperation. Understanding how to enhance cooperation is important given the increasing use of team settings in practice. Control systems often provide feedback on cooperative actions of coworkers, which can help enable cooperation in teams and between organizational units. We predict that involvement in the design of feedback systems can be a source of trust between employees and enhances cooperation. This is particularly important for dynamic environments, in which an incomplete feedback system which initially provides perfect signals of cooperation no longer does so after the environment changes. Adding to prior evidence, we find that an incomplete feedback system can benefit cooperation in a static environment, but the benefit is greater when employees were initially involved in its design. In a dynamic environment, an incomplete feedback system fails to facilitate cooperation unless employees were involved in its design. Our results identify a behavioral benefit for firms that grant decision rights to employees as part of their organizational architecture.

ABSTRACT We experimentally investigate how subordinates’ budget reporting in hierarchical organizations is influenced by social distance between subordinates and their direct manager. Although prior research promotes reducing this social distance to improve cooperation and efficiency, we contend that reduced social distance can differentially influence budget reporting, conditional on the manager’s stake in the residual claim. As predicted, we find through two studies that the effect of reduced social distance changes from increasing subordinates’ honesty to decreasing subordinates’ honesty as the manager’s stake in the residual claim decreases. We also find that subordinates’ concern for the manager’s economic well-being and concern about the manager’s impression of their reporting behavior mediate these results. The implications of our findings for management accounting theory and practice are discussed. Data Availability: Please contact the authors. JEL Classifications: C91; D91; M41.