In a world characterized by increasing pressure from financial and product markets, the question of how exogenous constraints affect internal coordination and control processes has become increasingly important. This experiment investigates how two exogenous constraints that superiors can face in budget negotiation settings, increased opportunity costs and financial pressure to meet unit targets, affect budget negotiations and subordinate effort. The results show that both constraints induce more cooperation, but in different ways. Financial pressure on the superior leads to more cooperative negotiation behavior by superiors and subordinates than increased opportunity costs. Specifically, subordinates do not take advantage of the superior's increased financial pressure to enforce lower budgets. After negotiation, both constraints strongly mitigate the negative effects of superior budget imposition on subordinate effort because exogenous constraints eliminate the effect of procedural fairness considerations on subordinate effort.

This study investigates whether task interdependence in teams alters the effectiveness of managerial discretion in motivating team performance. Teams are particularly useful when employees' tasks are interdependent—that is, when the degree to which the increase in team performance resulting from a team member's effort depends on the effort and skills of the other team members. The reason is that the more interdependent tasks are, the more employees need to coordinate their actions and help one another to achieve their objectives. Prior research analyzing settings where task interdependence is absent suggests that providing managers with discretion over team bonus allocation can improve team performance relative to equal team bonus allocations because it strengthens the link between contributions to team output and rewards. Economic theory suggests that managerial discretion will also improve team performance when task interdependence is present and information is efficiently used. However, we use behavioral theory to predict that managerial discretion is less effective in the presence of task interdependence, because managers do not fully incorporate all relevant information into bonus decisions and because managerial discretion hurts coordination and helping, which is particularly problematic under task interdependence. We find that while discretion over compensation has a positive effect on team performance relative to equal bonus allocation when task interdependence is absent, it has a negative effect when task interdependence is present. Additional analyses provide support for our underlying theory. Results of our study contribute to both theory and practice by suggesting that, ironically, managerial discretion may be most useful when the potential benefits of employing teams are lowest and least useful when the potential benefits are highest. Our results help explain why firms often grant managers only partial or no discretion over team members' compensation.

This study investigates whether environmental risk affects the efficiency of negotiated transfer prices. We analyze a setting where the buyer faces environmental risk but the seller does not. From the risk‐neutral firm's perspective, the transfer should be made in our setting because the expected value of the buyer's profit is greater than the certain opportunity cost of the seller from the transfer. We develop hypotheses to predict that, as environmental risk increases, it becomes more difficult for buyers and sellers to reach agreement. Such difficulty reduces efficiency in terms of both firm profit and negotiation time. We test our hypotheses via an experiment in which buyer and seller dyads negotiate over the transfer of a resource at six levels of environmental risk. Results show that, as predicted, environmental risk decreases efficiency. Specifically, as environmental risk increases, the frequency of agreement decreases, thereby reducing expected firm profit. Further, environmental risk increases negotiation time for those dyads that are able to reach an agreement. Data suggest that the cause of the decreased efficiency is that buyers and sellers use different reference points for determining a fair transfer price and environmental risk exacerbates the effects of such differences.

This study investigates whether the benefit firms can extract from team member communication to the team manager—who may use such information for rewarding individual team members—is affected by differences in the type of mutual monitoring information available to team members. We predict and find that team performance is higher when team members can observe only each other's effort than when they can observe both each other's effort and output levels; conversely, team performance is lower when team members can observe only each other's output than when they can observe both each other's effort and output levels. The intuition behind these results is that the type of observable mutual monitoring information creates different degrees of ambiguity regarding what should be considered a fair reward allocation for team members' contributions. Such ambiguity reduces the usefulness of team member communication to the manager for allocating rewards, resulting in lower team performance. Data Availability: Data are available from the authors upon request.

This study investigates whether subjective communication from team members to a manager responsible for allocating performance-based bonuses increases team performance and whether the efficacy of such communication is reduced in heterogeneous teams. We draw on both economic and behavioral theories to predict that communication content, even though subjective, provides information that enables the manager to allocate bonuses so as to enhance the relation between individuals' contributions and rewards, thereby increasing individuals' effort and team performance. However, we also predict that the positive effect of team member subjective communication is more muted when team members' abilities are heterogeneous compared to homogeneous. We test these predictions via an experiment. Consistent with our predictions, team member subjective communication has a positive effect on team performance, and the positive effect is more muted for heterogeneous teams. Results of our study contribute to both theory and practice by enhancing our understanding of the role of subjective communication from team members to team managers in motivating effort in teams and, particularly, how its efficacy is affected by team composition. Data Availability: Data are available from the authors upon request.

We conduct two experiments to investigate the effects of giving subordinates the possibility to return budget surplus on capital budgeting processes. We predict and find that when subordinates face low uncertainty when submitting their budget request, the possibility to return budget surplus increases budget requests compared to not having this possibility but that this effect is mitigated under high uncertainty. We also predict and find that subordinates return more budget surplus under high than low uncertainty. Together, these results imply that the possibility to return budget surplus can be particularly beneficial for firms operating under high uncertainty. We contribute to the literature by integrating an important feature of budgeting practice into research, i.e., subordinates’ possibility to return budget surplus and by showing that the effects of implementing such an option may strongly depend on the level of uncertainty a subordinate faces. Data Availability: The data and research instrument are available from the authors upon request.

We investigate how performance-to-target (exceeding versus missing prior target) and task type (ability-driven versus effort-driven) affect managers' target-setting decisions in a setting where a manager sets targets for multiple employees. To do so, we use an experiment that involves executives, who average more than 16 years of work experience. We predict and find stronger target adjustments when prior targets are exceeded than when they are missed, especially when tasks are ability-driven. We also predict and find targets are differentiated more between employees within a firm when tasks are ability-driven rather than effort-driven, but this effect is attenuated when prior targets are missed. As prior empirical findings are inconclusive in this area of research, we contribute to the literature by providing controlled experimental evidence about the asymmetric nature of target adjustments. Additionally, we identify an important factor affecting managers' target-setting decisions—task type—that has largely been neglected in prior work.