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The Impact of Financial Incentives on Decision Making: Further Evidence
Lookup NU author(s)
Professor Ian Dobbs
Dobbs IM, Miller AD
Conference Proceedings (inc. Abstract)
British Accounting Association Annual Conference 2007
Royal Holloway, University of London
Year of Conference
3-5 April 2007
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In two previous studies, a common experimental environment was used to test the hypothesis that individuals with profit-related rewards would be motivated to make better use of information and to enhance the profit performance of the firm relative to a control group of individuals earning a flat-rate reward unrelated to profit performance. One study reported significantly greater profit performance when individuals received profit-related rewards; the other reported no significant difference between the two groups of individuals. The present paper explores potential reasons for the discrepancy between the two studies, including the complexity of the experimental environment and the saliency of incentives provided to subjects. The present paper makes three contributions to the literature. Firstly, it provides new additional evidence on the role, in performance measurement and decision making, of information, of which the managerial accounting function constitutes an important special case. Second, it explores the relation between saliency of subject rewards and experimental outcome, supplying general evidence relating to the methodology of experimental design. Third, the statistical modelling for the common experimental environment used in this and the previous two studies is developed to take account of data issues affecting all three studies. The results suggest that comprehension of the environment materially affects the quality of experimental data in the predicted direction; that is, those who understood the environment less well, were also less responsive to that environment. We also find that real money incentives do affect subject behaviour and performance in experiments. When information valuable for enhancing profit is also costly, its effective use by individuals can be increased if individuals are given, even quite modest, profit-related incentives. The saliency of individual money consequences appears to be important in driving this result, since when the costs and benefits of information are not salient, subjects may still endeavour to use information to enhance profit, but in a spirit of cooperation.
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