RESEARCH PROPOSAL

Name:

Oana Bobic

Student number:

10599290

Title:

Do reputation concerns supress the reaction to being controlled?

INTRODUCTION AND MOTIVATION

The reason why the principal-agent problem is of interest is the fact that there are several differences
between their interests. In order to avoid the employees following their own interests, principals often
decide to control them. Falk & Kosfeld (2006) find that the decision to control leads to a significant
decrease in the agents willingness to follow the principals interest. The result is explained by the fact
that the agents motivation considerably decreases when being controlled: he is not trusted and, also, the
principal may turns out to have lower expectations than he had supposed.
These conclusions have a particular relevance for organizations design. When deciding whether to
control or not, one has to take into account these implications. But they do no act on their one. There are
many other forces that drive the agents decision and a very important one is reputation. It is more than
reasonable to think that reputation concerns are given strong consideration by the agent before making
any decision. The two factors control and reputation concerns have opposite effects and that leads to
the following (research) question:
Do reputation concerns supress the reaction to being controlled and if so, to what extent?
IMPLEMENTATION
The most realistic source for gathering information in order to study this matter would be actual
organizations. Still, there are two reasons why this will not be the choice: there are many obstacles in
obtaining such data and, more importantly, these specific effects might be difficult to differentiate from
the other driving forces. We then turn to an experiment.
Building on Falk & Kosfeld's (2006) experiment, we will have two parts. Each part consists of one-shot
games of two players: the principal and the agent. In the first part, the principal decides whether or not
to control the agent by imposing a predetermined minimum amount of effort, while the agent has to
decide on the level of effort considering each possibility (control/no control). The principals payoff
directly depends on the agents choice (
2 and the agent receives an initial endowment from
which his effort will be subtracted in order to determine his payoff (
), where is the agents
choice of effort level.
In the second part, the principals will be informed about their opponents choice in the first part
(also/only relative to the average choice of effort level) and, next to deciding whether to control or not,
they will also have the possibility to choose the agents initial endowment
from a predetermined set
of values. Each player will keep his initial role, but will be matched with a different person. By making
this information available from the beginning of the experiment, reputation concerns will be induced to
the agents in the first round. In order to have a control group concerning reputation, the first part will
also be played alone.

HYPOTHESES
The following hypotheses will be tested:
Hypothesis 1: Effort levels will be higher in the first part.
Hypothesis 2: Principals will control less in the second part.
Hypothesis 3: When being controlled by the principals, agents in the control group (only first part) will
have lower effort choices than agents in the treatment group (both parts).
Hypothesis 4: Agents with effort levels above average in the first part will receive higher wages in the
second part.
DATA COLLECTION
The experiment will take place in Romania, most probably with paper and pen in lecture rooms of a
(chemistry) university. One person will participate in only one of the treatments, only once, in order to
avoid learning effects.

RELATED LITERATURE
This particular matter has not been previously studied. Wernerfelt (1988) has a theoretical study on
strategic monitorings impact on reputation building, one of the conclusions of relevance for the
research question being that If agents are risk-neutral, the principal always monitors more early in the
game, while an agent may or may not work harder early in the game. This proposition led to
formulating the first two hypotheses. The aspect that Wernerfelt (1988) ignores is the effect of being
monitored on the agent the monitoring decision is viewed only from the principals perspective.
(Servtka 2009) performs an experiment on reputation, social influence and identification effects in
dictator games. He induces reputation in a similar way to the one included in this research proposal and
finds it has the greatest effect of the three studied concepts.

LIMITATIONS
In order to avoid an extra session, I will assume that the agents decision wouldnt be significantly
different if it came as an actual reaction to the principals choice, as proven by Falk & Kosfeld (2006)
with the SR10 treatment. They also have an EX10 treatment through which they control whether
imposing a minimum amount of effort is still as big as a problem when coming as an outside decision
we will also assume their results valid in this case (agents mostly react negatively to the principals
decision to control, not to having a minimum level of effort imposed).
Next to these two assumptions that will not be checked for, there is also the general laboratory
experiment limitation: along with higher internal validity comes lower external validity.

REFERENCES
Falk, A. & Kosfeld, M., 2006. The Hidden Costs of Control. American Economic Review, 96(5),
pp.16111630.
Servtka, M., 2009. Separating reputation, social influence, and identification effects in a dictator game.
European Economic Review, 53(2), pp.197209.
Wernerfelt, B., 1988. Reputation, monitoring, and effort. Information Economics and Policy, 3(3),
pp.207218.