This study examines how two factors, the agents’ perceptions regarding the fairness of the principal and inter-agent communication, affect agents’ behaviors under a peer reporting system. Analytical models show that when agents can observe each other’s actions and local signals, a peer reporting system with a verification mechanism (using one agent’s information to verify the other’s) and a reward for truthful whistleblowing can induce agents to report honestly and thereby help the principal achieve the first-best outcome. However, behavioral research suggests that the agents’ perception regarding the fairness of the principal, as well as communication among agents, may affect how honestly agents report. The results of my experiment show that, under a peer reporting system with a high reward for whistleblowing, the agents’ perception regarding the fairness of the principal positively affects the agents’ reporting honesty and negatively affects their explicit attempts at collusion. Communication between agents decreases their reporting honesty when the principal is perceived as unfair, but not when the principal is perceived as fair.

In an environment where individual productivity can be increased through efforts directed at a conventional task approach and more efficient task approaches that can be identified by thinking outside-the-box, we examine the effects of productivity-target difficulty and pay contingent on meeting and beating this target (i.e., target-based pay). We argue that while challenging targets and target-based pay can hinder the discovery of production efficiencies, they can motivate high productive effort whereby individuals work harder and more productively using either the conventional task approach or more efficient task approaches when discovered. Results of a laboratory experiment support our predictions. Individuals assigned an easy productivity target and paid a fixed wage identify a greater number of production efficiencies than those with either challenging targets or target-based pay. However, individuals with challenging targets and/or target-based pay have higher productivity per production efficiency discovered, suggesting these control tools better motivate productive effort. Collectively, our results suggest that the ultimate effectiveness of these control tools will likely hinge on the importance of promoting the discovery of production efficiencies relative to motivating productive effort. In doing so, our results provide a better understanding of conflicting prescriptions from the practitioner literature and business press.