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BEHAVIORAL RESEARCH IN ACCOUNTING

Vol. 22, No. 1


2010
pp. 4365

American Accounting Association


DOI: 10.2308/bria.2010.22.1.43

The Effects of Incentives on Information


Exchange and Decision Quality in Groups
Khim Kelly
University of Waterloo
ABSTRACT: This study uses an experiment to examine the effects of different compensation contracts flat wage, group incentive, and noncompetitive individual incentive on decision quality when information is distributed among different individuals. The
results indicate that information exchange and decision quality are better under the
group incentive than the individual incentive, even when both incentives provide an
economic motivation for information exchange. Information exchange and decision
quality are also better under the flat wage than the individual incentive, despite the
stronger economic motivation for information exchange under the individual incentive.
Analyses indicate that the effect of compensation contracts on decision quality is partially mediated through information exchange between group members. The results are
consistent with higher group membership saliency under the group incentive and the
flat wage than the individual incentive, and group membership saliency promoting information exchange between group members. The results also suggest that in a group
decision-making context, differences in decision quality across compensation contracts
may be better explained by psychological factors rather than economic factors.
Keywords: group decision-making; group membership; incentives; information exchange.
Data Availability: Contact the author.

INTRODUCTION
nformation that could improve a decision is often distributed among different individuals due
to either inherent differences in knowledge, experience, and expertise, or the nonintegration of

I thank the anonymous reviewers and the editor for their comments and suggestions; Bran Kelly for his programming
expertise; Stephen Courtenay, Charlene Geisler, Bernardine Low, and Asheq Rahman for piloting the experimental materials; and Adam Ng, Chin Li Peh, Yen Li Poh, Doreen Seah, and Lay Koon Tan for their able research assistance. I also
appreciate the comments on earlier versions of this paper from Anne Farrell, Julia Higgs, Steve Salterio, Hun Tong Tan,
Bill Waller, and participants at the 2006 ABO Research Conference and the 2007 Global Management Accounting Research Symposium. Financial support from the Singapore Ministry of Education Academic Research Fund is gratefully
acknowledged.

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information systems in the firm.1 Psychological research indicates that decision quality is often
impaired under such a scenario because decision makers do not adequately consider unique information but focus more on commonly held information e.g., Winquist and Larson 1998; Gigone
and Hastie 1993; Stasser and Titus 1985. The empirical evidence on how incentives influence
information exchange and employee performance is limited and mixed e.g., Siemsen et al. 2007;
Wageman 1995.2 Consequently, there has been a call for more managerial accounting research on
how incentives affect the discussion of differentially distributed information and the resultant
decision quality Sprinkle 2003.
To answer the call for more research in this area, this study uses an experiment to examine the
effects of different compensation contracts flat wage, group incentive, and noncompetitive individual incentive on decision quality when each individual in a group possesses private information that is useful for improving a decision. The study also examines the mechanism through
which compensation contracts affect decision quality i.e., information exchange between group
members, and attempts to disentangle the economic versus psychological effects of compensation
contracts on decision quality.
This study extends prior research by examining how different compensation contracts affect
the process through which individuals share and discuss private information with fellow group
members, and the impact on decision quality. Studies that have examined the impact of incentives
in group settings focus more on effort choices e.g., Coletti et al. 2005; Towry 2003 or production
tasks e.g., Guthrie and Hollensbe 2004; Fisher et al. 2003; Drake et al. 1999; Young et al. 1993,
with less attention on the information exchange process and performance in group decisionmaking tasks. Studies that have examined how incentives affect information sharing among employees either rely on self-reported rather than actual information sharing e.g., Siemsen et al.
2007; Ravenscroft and Haka 1996; Wageman 1995, or do not link information sharing to performance e.g., Taylor 2006.
Participants in the experiment individually read information about multiple alternatives before
convening in groups of three for a group discussion. Some of the information is commonly held by
all three group members, whereas other information is unique to one group member. The total
information favors one alternative, but that best alternative is hidden from individual group members because each member has only a portion of the total information. After the group discussion,
participants make two decisions: a group decision and an individual decision.3 The flat wage does
not link compensation to either the group or individual accuracy. The group incentive rewards
participants based on the accuracy of their group decision. The individual incentive rewards
participants if their individual decision is accurate, independent of other group members accuracy.
Thus, the individual incentive is noncompetitive in nature.4

For example, cost information from the accounting system may not be integrated with information from other systems
in the firm such as production, logistics, human resource, sales and distribution, or customer relationship management
Quattrone and Hopper 2005; Williams 2004.
Prior psychological research that has examined the effects of information distribution on group decision-making has not
directly examined the effects of different compensation contracts, and has been criticized for ignoring how information
exchange in natural settings is driven by the incentives and motivations of group members Wittenbaum et al. 2004.
Student participants in prior studies typically receive course credit independent of decision accuracy e.g., Stasser et al.
2000; Winquist and Larson 1998; Hollingshead 1996. The exceptions are Fraidin 2004 and Greitemeyer and SchulzHardt 2003, which reward participants based on the accuracy of their individual decisions, but these two studies do not
examine different compensation contracts.
This study examines both group decision quality and individual decision quality because the problem of differentially
distributed information can arise in both group decisions and individual decisions in the real world. Teams comprising
multiple individuals or divisions within an organization, or cross-organization collaborations such as joint ventures,
strategic alliances, and integrated supply chains make collective group decisions with each entity possessing different
information. In individual decisions, people often do not have all the necessary information and thus require information

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American Accounting Association

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The Effects of Incentives

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The results indicate that information exchange and decision quality are better under the group
incentive than the individual incentive, even when both incentives provide an economic motivation for information exchange. Information exchange and decision quality are also better under the
flat wage than the individual incentive, despite the stronger economic motivation for information
exchange under the individual incentive. Analyses indicate that the effect of compensation contracts on decision quality is partially mediated through information exchange between group
members. The results are consistent with higher group membership saliency under the group
incentive and the flat wage than the individual incentive, and group membership saliency promoting information exchange between group members.
This study contributes to the existing literature by delineating the economic versus psychological effects of compensation contracts in a group decision-making setting. A premise of prior
research is that incentives provide economic motivation to direct effort toward improving the
rewarded performance Bonner et al. 2000; Camerer and Hogarth 1999. This study finds evidence
suggesting that in a group decision-making context, differences in decision quality across compensation contracts may be better explained by psychological factors rather than economic factors.
In particular, using group versus individual performance measures in the compensation contracts
influences the psychological salience of group membership Charness et al. 2007; Welbourne and
Cable 1995.5 Group membership saliency may affect the extent to which group members engage
in information exchange, which ultimately impacts the decision quality.
The remainder of the paper is organized as follows. The second section develops the hypotheses. The third section describes the design of the experiment, and the fourth section reports the
results. The final section concludes with a discussion of the findings and the limitations of the
study.
HYPOTHESES DEVELOPMENT
Information exchange is critical for improved decision-making when individuals in a group
each possess unique information that is useful for identifying the best available alternative. The
decision quality is affected by the extent to which individuals share information as well as the
extent to which they assess thoroughly and accurately the positive or negative implications of the
information for the various alternatives Stasser et al. 2000; Hollingshead 1996. However, the
inadequate pooling and weighting of unique information vis--vis common information during
group discussion often impair decision quality Wittenbaum et al. 2004; Chernyshenko et al. 2003;
Hunton 2001. Compensation contracts can affect information exchange and hence decision qual-

from others before making their decisions independently. For example, it is common for auditors to consult with firm
personnel who are not on the audit team when they are making audit engagement, planning, and fieldwork decisions
Danos et al. 1989.
In a competitive individual incentive, a group members compensation would be reduced by other group members
accuracy, thus providing an economic disincentive for information exchange. This study focuses on a non-competitive
individual incentive rather than a competitive individual incentive for two reasons. First, prior studies have already
established that performance is lower under a competitive individual incentive than a group incentive e.g., Ravenscroft
and Haka 1996; Miller and Hamblin 1963, which is expected given the economic disincentive for cooperation under the
competitive individual incentive. However, prior studies have not examined a non-competitive individual incentive in
which there is an economic motivation for information exchange. Second, as discussed in greater detail in the paper,
contrasting the non-competitive individual incentive against the group incentive and the flat wage enables the study to
better disentangle the economic versus psychological effects of compensation contracts.
Incentive contracts may use either group or individual performance measures. Profit-sharing and gain-sharing plans that
reward employees based on firm- or division-wide performance measures are examples of group incentive contracts
Hansen 1997; Shepard 1994; Kaufman 1992. Individual incentive contracts include piece-rate schemes and bonus
plans that are linked to individual performance such as salespersons who receive commissions based on their individual
sales, or division managers who are evaluated based on their divisions performance rather than firm-wide performance
CIPD 2008.

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ity through economic and psychological forces. Figure 1 outlines the relationships between compensation contracts, information exchange, and decision quality that are examined in this study.
Group Incentive versus Individual Incentive
First, I consider the economic effect of the group incentive versus the individual incentive. A
group incentive rewards people based on the accuracy of their group decision. Consequently,
group members under the group incentive have an economic motivation to exchange information
so as to improve their group decision. On the other hand, an individual incentive rewards people
based on the accuracy of their individual decision and provides economic motivation for people to
improve their individual accuracy. Economists argue that a noncompetitive individual incentive
will encourage employees to cooperate and share knowledge with each other when it is mutually
beneficial for them to do so Siemsen et al. 2007; Nalebuff and Stiglitz 1983, 40. Group members
under the individual incentive have an economic motivation to offer information so as to encourage others to offer information necessary for improving their individual decision.6 Furthermore,
people are more motivated to incorporate the information and opinions offered by others in their

FIGURE 1
Relationships between Compensation Contracts, Information Exchange, and Decision
Qualitya,b,c
Compensation contractsa
Flat wage
Group incentive
Individual incentive

Information Exchangeb
Common information
Unique information
Inference statements

Decision Qualityc
Group accuracy
Post-discussion individual accuracy

There were three types of compensation contracts. In the flat wage condition, a group member was entered
into a lottery with a 1-in-3 chance of winning $20 regardless of group or individual accuracy. In the group
incentive condition, a group was entered into a lottery with a 1-in-3 chance of winning $60 to be divided
equally among the three group members if the group decision was accurate. In the individual incentive condition, a group member was entered into a lottery with a 1-in-3 chance of winning $20 if the post-discussion
individual decision was accurate.
There were a total of 12 information items per company, of which three were common items held by all three
group members and nine were unique items held by only one group member with each group member holding
three unique items. The group discussion transcripts were coded for: (1) number of common information
items discussed; (2) number of unique information items discussed; and (3) number of inference statements
made, which included statements that drew conclusions about a company, made assertions about the consequences arising from the given information, and expanded or elaborated on the given information.
After the group discussion, participants made a group decision and an individual decision as to which company out of three companies was the best financial investment.

Although there may be a concern that group members under the individual incentive would be inhibited from initiating
information sharing because they do not trust their fellow group members to reciprocate, prior studies show that people
are willing to make the first move and trust others to reciprocate even when they risk economic loss to do so e.g.,
Kurzban et al. 2008; Ortmann et al. 2000; Berg et al. 1995. Furthermore, group members in this study do not risk any
economic loss from initiating information sharing and stand only to gain if other group members reciprocate, which
would reduce any inhibition to initiate information sharing.

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individual decisions under performance-contingent rewards Sniezek et al. 2004. Therefore, when
group members are aware that they individually hold unique information that is critical for identifying the best decision alternative, both the group incentive and the individual incentive would
economically motivate group members to exchange information as well as discuss the implications
of the information more thoroughly, because doing so would improve both group accuracy and
individual accuracy. Under the economic effect, decision quality is expected to be equivalent
between the group incentive and the individual incentive because both incentives provide an
economic motivation for information exchange.
Next, I consider the psychological effect of the group incentive versus the individual incentive. The group incentive heightens group membership saliency Charness et al. 2007 and encourages cooperative behavior because it ties compensation to group performance Taylor 2006;
Shirani et al. 1998; Welbourne and Cable 1995; Hatcher and Ross 1991; Ackelsberg and Yukl
1979; Deutsch 1949.7 In contrast, the individual incentive which links individual performance to
compensation makes individual performance more salient, and may promote selfish behavior such
as the hoarding of information Van Alstyne 2005; Katz 2000. Rewarding people based on
individual performance may encourage them to behave individualistically, such that they focus on
achieving their personal goal and ignore the goal achievement of others Johnson et al. 1981. This
individualistic orientation and dampened salience of group membership under the individual incentive may inhibit group activities such as information sharing and discussion. Rowe 2004
similarly argues that reporting group-level rather than individual-level performance induces people
to adopt a group frame instead of an individual frame, with the group frame encouraging people
to care more about others outcomes and the individual frame engendering a more self-centered
focus. A salient group frame also promotes greater trust in fellow group members Rowe 2004;
Yamagishi and Kiyonari 2000; Kramer 1999; Kramer et al. 1996, and trust increases peoples
willingness to exchange information and be influenced by others Butler 1999; Kramer et al. 1996;
Boss 1978; Zand 1972. From the psychological point of view, decision quality is expected to be
better under the group incentive than the individual incentive because the group incentive increases group membership saliency, which fosters an increased level of information exchange.
Based on the preceding discussion, there are two competing hypotheses with respect to the
effects of group versus individual incentives on information exchange and decision quality. Hypothesis 1a posits the economic effect of group versus individual incentives, whereas H1b posits
the competing psychological effect.
H1a (Economic effect): Information exchange and decision quality are not different between
the group incentive and the individual incentive.
H1b (Psychological effect): Information exchange and decision quality are better under the
group incentive than the individual incentive.
Flat Wage versus Individual Incentive
Hypothesis 1a argues that both the group incentive and the individual incentive provide an
economic motivation for information exchange. However, group members may arguably face
7

Although prior research has found that a group incentive relative to an individual incentive increases cooperative
behavior Taylor 2006; Shirani et al. 1998; Hatcher and Ross 1991; Ackelsberg and Yukl 1979; Deutsch 1949, there is
typically an economic incentive for cooperative behavior under the group incentive but not so under the individual
incentive in prior studies. Therefore, an increase in cooperative behavior under a group incentive versus an individual
incentive in prior studies could be due to either the economic incentive for cooperative behavior or group membership
saliency under the group incentive. This study is designed such that there is an economic incentive for cooperative
behavior under both the group incentive and the individual incentive. Thus, any difference between the two incentives
could be better attributed to group membership saliency rather than the economic incentive for cooperative behavior.

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lower economic motivation to exchange information under the individual incentive than the group
incentive. Under the individual incentive, group members are motivated to share and discuss their
individual information with others insofar as it would encourage others to offer their individual
information, and if they believe others have insights and expertise that would improve their
individual accuracy. However, they are not motivated to help others make accurate individual
decisions. As such, finding that information exchange and decision quality are better under the
group incentive than the individual incentive i.e., support for H1b rather than H1a may still not
provide a strong conclusion that it is the psychological effect rather than the economic effect that
is driving information exchange and decision quality.
In order to better disentangle the economic versus psychological effects of compensation
contracts, I contrast a flat wage that is not contingent on either group or individual decision
accuracy against the individual incentive. There is a stronger economic motivation for information
exchange under the individual incentive than the flat wage. Under the economic effect, information exchange and decision quality should be better under the individual incentive than the flat
wage. However, the flat wage does not highlight individual performance, and therefore group
membership should be more salient under the flat wage than the individual incentive. Under the
psychological effect, information exchange and decision quality are expected to be better under
the flat wage than the individual incentive.
Therefore, there are two competing hypotheses with respect to the effects of flat wage versus
individual incentive on information exchange and decision quality. Hypothesis 2a posits the economic effect of flat wage versus individual incentive, whereas H2b posits the competing psychological effect.
H2a (Economic effect): Information exchange and decision quality are better under the
individual incentive than the flat wage.
H2b (Psychological effect): Information exchange and decision quality are better under the
flat wage than the individual incentive.
Regardless of whether the effects of compensation contracts on information exchange and
decision quality are economic or psychological in nature, Hypothesis 3 posits that the effect of
compensation contracts on decision quality is mediated through information exchange.
H3: The type of compensation contract affects the extent of information exchange, which in
turn positively affects decision quality.

DESIGN OF EXPERIMENT
Participants
In total, 220 junior and senior undergraduate students from a university in Singapore participated in the experiment. The students were accounting n 108 and business n 112 majors
who had taken at least one financial accounting course and one management accounting course, so
that they had a basic understanding of the information items presented to them for the task, which
involved making an investment decision. The average age of the participants was 21.15 years, and
67.27 percent were females.8 The participants worked in groups of three, forming 68 groups. Four

Age and gender are not significant covariates in the logistic regressions for pre-discussion individual accuracy all
p-values 0.129 or post-discussion individual accuracy all p-values 0.302. Educational major accounting or
business is a significant covariate in the logistic regression for pre-discussion individual accuracy p 0.010, but it is
not a significant covariate in the logistic regression for post-discussion individual accuracy p 0.508. Year in the
undergraduate program is not a significant covariate in the logistic regression for pre-discussion individual accuracy p

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groups were dropped from the data analyses because participants revealed their real names during
the group discussion or because a group member could not enter the virtual chat room for the
group discussion due to computer software problems.9 Sixteen extra participants remained after
forming groups in the experimental sessions, and they completed an individual decision-making
task instead of the group decision-making task.
Experimental Procedure
The experiment took place at computers. Each experimental session had six to 18 participants.
Participants arrived at the computer laboratory and were seated at computers with an empty space
between each person. They were instructed not to talk to each other during the experimental
session.
At the beginning of an experimental session, participants were given instructions on the task
and the experimental procedures. The task was to decide which of three companies Alpha, Beta,
and Gamma was the best medium- to long-term five to ten years financial investment. After
reading the task instructions, participants were randomly assigned to groups of three and they did
not know who their fellow group members were. Group members were instructed to refer to each
other only by their group member identification number and to remain anonymous throughout the
study.10 Each group member maintained the same role throughout the experiment.
The groups were then randomly assigned to one of the conditions in the experiment. Participants were given a description of their compensation contract. Next, participants answered three
questions about their compensation contract which served as manipulation checks for the compensation contract, and all three questions must be answered correctly before participants could
proceed with the experiment. Then, participants were given ten minutes to individually read
information about the three companies.11 Participants were informed that they would continue to
have access to their individual information throughout the study. They were told that within a
group, some group members might have information that other group members did not have, and
that one company was the best choice when all information was considered. Participants indicated
their individual decision before entering a virtual chat room to discuss with the other two members
of their group. Groups were given a maximum of 30 minutes for the group discussion and to reach
a group decision.12 Groups could end their group discussion earlier if they reached a group
decision before the allotted 30 minutes was up. After the group discussion, a pre-assigned group

9
10

11
12

0.479, but it is a marginally significant covariate in the logistic regression for post-discussion individual accuracy p
0.077. Given that the results are similar including these demographic variables as covariates, the demographic
variables are ignored for the rest of the paper. All p-values reported in the paper are two-tailed, unless otherwise stated
where the statistical test is for only one direction.
The results are similar including these four groups.
The experiment uses anonymity and computer-mediated discussion so as to focus on the effects of information distribution and compensation contracts. Anonymity removes effects related to social context cues such as gender, race,
physical appearance, and social norms. The group decision support system literature also shows that anonymity results
in more open discussion Gavish et al. 2000; Jessup et al. 1990. Computer-mediated discussion eliminates effects
related to face-to-face, verbal, and non-verbal communication cues such as facial expression, voice inflexion, and body
language. Research on face-to-face versus computer-mediated discussions indicates that computer-mediated discussions
have the advantage of social equalization such that group members participate more equally Kiesler and Sproull 1992;
Siegel et al. 1986, and that the process of group decision-making in face-to-face and computer-mediated discussions is
similar Weisband 1992. However, computer-mediated discussions can result in lower social presence which makes it
more difficult to create a cooperative environment Barkhi et al. 2004.
The pilot study indicated that ten minutes was sufficient for participants to review the information items.
The pilot study indicated that 30 minutes was sufficient for the group discussion. The mean time taken by groups to
complete their discussion was 20.77 minutes std. dev. 7.06 minutes. Groups do not spend more time in discussion
under the group incentive versus the individual incentive t 1.21, p 0.233, nor under the flat wage versus the
individual incentive t 0.70, p 0.486.

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member indicated the group decision. Group members indicated their individual decision again
and were told that their individual decision need not agree with the group decision. Finally,
participants answered a post-experimental questionnaire.
Experimental Design
There were three experimental conditions wherein the three group members shared certain
common information items but individually possessed unique information items, and participants
worked under the flat wage, the group incentive, and the individual incentive, respectively. In
addition, there was a control All-Info condition where all information items were shared by all
three group members, and participants worked under the flat wage. The All-Info condition is used
to verify that participants are able to make better decisions when they are given all information
than when information is distributed.
Operationalization of Variables
Decision Task and Information Items
This study uses a decision task, known as the hidden profile decision task, commonly used in
psychological research on information exchange during group decision making e.g., Stasser and
Titus 1985; Stasser et al. 2000. In a hidden profile decision task, the total profile of information
favors a decision alternative, but that best alternative is not apparent from the common information held by all group members and the private information held by each group member.
The experimental materials were newly developed but adopted similar information distribution patterns as in prior hidden profile studies. There were 12 information items per company, with
a total of 36 information items for all three companies Alpha, Beta, and Gamma. The total
information favored Beta nine positive items and three negative items over Alpha five positive
items and seven negative items and Gamma five positive items and seven negative items. Each
company had four financial information items earnings per share, gross margin, dividend per
share, and current ratio and eight nonfinancial information items e.g., information regarding
litigation issues, products, marketing strategies, and management.13 Table 1 shows the distribution of information items across the three companies and a group member.
Each group member had six information items per company prior to the discussion, of which
three items were commonly held by all group members and three items were uniquely held by
only that group member. The superior alternative Beta was hidden from the group members before
group discussion because the pre-discussion information items that each member held did not
favor any company, and the common information items favored Alpha and Gamma over Beta. The
six pre-discussion information items per company were balanced with three positive items and
three negative items. The three common information items per company were such that there were
two positive items and one negative item for both Alpha and Gamma, and three negative items for
Beta.
I conducted two tests to ensure that the total profile of information supported Beta as the best
company and did not differentiate between Alpha and Gamma. First, the experimental materials

13

Examples of information on Beta were an approval from the U.S. Food and Drug Administration for a high potential
drug, a Standard & Poors report on its strong portfolio of drugs and robust R&D pipeline, and a warning on one of its
new drugs issued by a non-profit organization that publicizes information on drug safety. Information on Alpha included
the company being ranked the fifth best company to work for by Fortune, an ongoing U.S. Securities and Exchange
Commission investigation for accounting irregularities, and the recall of a product with design flaws. Gamma had
information such as the announcement of an important licensing and collaboration agreement with another company, a
Standard & Poors report on expected sale losses from patent expirations, and a warning received from the U.S.
Department of Health and Human Services for violation of U.S. Current Good Manufacturing Practices regulations.

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TABLE 1
Distribution of Information Items in the Decision Task
Panel A: Distribution of Total Information Items across the Three Companiesa
Company
Positive Information Items
Negative Information Items
Alpha Company

5 positive items
2 common
3 unique

7 negative items
1 common
6 unique

Beta Company

9 positive items
9 unique

3 negative items
3 common

Gamma Company

5 positive items
2 common
3 unique

7 negative items
1 common
6 unique

Panel B: Distribution of Pre-Discussion Information Items across the Three Companies Held by a
Group Memberb
Company
Positive Information Items
Negative Information Items
Alpha Company

2 common
1 unique

1 common
2 unique

Beta Company

3 unique

3 common

Gamma Company

2 common
1 unique

1 common
2 unique

There were a total of 12 information items per company. Three out of the 12 information items per company were
common items held by all three group members. Nine out of the 12 information items per company were unique items
held by only one group member, with three unique items distributed to each group member.
In the three experimental conditions flat wage, group incentive, and individual incentive, each group member held six
information items per company prior to the group discussion, of which three were common items and three were unique
items. There was also a control All-Info condition where all information items were given to all three group members.

were piloted with four accounting professors. Two accounting professors read all 36 information
items and both identified Beta as their best choice. Another two accounting professors read the
three common information items per company, with one choosing Alpha and the other choosing
Gamma. Second, data from the 16 extra participants who completed an individual decisionmaking task were analyzed. These 16 participants reviewed all the 36 information items that were
given to participants in the group decision-making task, made an individual decision, and provided
an importance rating and a direction rating for each information item. The importance rating
concerned the importance of an information item in the participants decision, on a scale of 0 not
important at all to 10 extremely important. The direction rating concerned whether an information item suggested a positive effect or a negative effect on the companys prospects as a mediumto long-term financial investment. The importance rating is multiplied by the direction rating to get
a score for each information item, and the scores for all 12 information items per company are
aggregated to get the total score for a company. Alpha had a mean score of 10.25, Beta a mean
score of 43.33, and Gamma a mean score of 14.88. Paired t-tests indicate that Beta had a higher
score than Alpha paired t 11.28, one-tailed p 0.001 and Gamma paired t 10.55, onetailed p 0.001, whereas Alpha and Gamma did not have significantly different scores paired t
1.14, p 0.274. In addition, 12 of these 16 participants 75 percent chose Beta, which was
better than a random chance of 33 percent 2 = 12.88, p 0.002.

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Independent Variable: Compensation Contracts


There were three compensation contracts. In the flat wage condition, all participants were
entered into a lottery with a 1-in-3 chance of winning $20 regardless of their group or individual
decision accuracy. In the group incentive condition, groups with the correct group decision were
entered into a lottery with a 1-in-3 chance of winning $60 that was split evenly among the three
group members. In the individual incentive condition, participants with the correct post-discussion
individual decision were entered into a lottery with a 1-in-3 chance of winning $20. In addition to
the lottery, all participants were paid $10 for participating in the study. The expected value of the
total payment receivable by a participant $16.67 was equal across the three compensation contracts when the correct group decision or post-discussion individual decision was made.
Dependent Variables
Decision quality. Decision quality was assessed by whether groups correctly chose Beta. An
accurate decision was coded as 1, whereas an inaccurate decision was coded as 0. In addition, the
post-discussion individual accuracy i.e., whether individuals correctly chose Beta was examined
as an alternative dependent variable for decision quality. Examining only group accuracy may bias
toward finding support for H1b Group incentive Individual incentive and H2b Flat wage
Individual incentive because group members under the individual incentive may perform better in
individual accuracy than group accuracy, given that they are rewarded based on individual accuracy. Moreover, the problem of differentially distributed information can occur in individual decisions as well as group decisions see footnote3.
Information exchange. The 64 group discussion transcripts were coded by either one of two
coders who were blind to the experimental conditions and the hypotheses. Twenty-two of the 64
transcripts were coded by both coders to calculate inter-coder reliabilities. A third coder resolved
any disagreements while being blind to the experimental conditions. The discussion transcripts are
coded for the following variables: 1 the number of common information items discussed out of
a total of nine common items r 0.97, p 0.001, 2 the number of unique information items
discussed out of a total of 27 unique items r 0.97, p 0.001, and 3 the number of inference
statements made r 0.87, p 0.001. Inter-coder reliabilities, which are reported in parentheses
above, are acceptable Landis and Koch 1977.
Inference statements represent discussion about implications of the information items, which
include statements that draw conclusions about a company, make assertions about the consequences arising from the given information, and expand or elaborate on the given information. In
order to choose the best company, group members not only need to have information about all
three companies, they also need to consider whether a piece of information has a positive or
negative implication on the choice of a particular company. When groups make more inference
statements about the information items, it would help participants assess implications of the
information better and improve decision accuracy. Examples of inference statements from the
discussion transcripts are as follows:
Bear in mind Alphas liquidity ratio is dropping due to its ambitions as a result, its debt rating
is falling, meaning it can be harder for them to get loans at a good rate in the future.
Alpha has got accounting problems under investigation by SEC in July, inflated their profits
so share price might fall suddenly very quickly.
Betas product Eleve is the only product curing diabetic pain five million patients have
diabetic pain this product Eleve is the only FDA-approved drug, so they have monopoly with
long-term orientation, we need to have a company which is strong financially and can come up with
new products or they have strong monopoly.

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I will stay with Gamma, take the risk and it seems that the lawsuit might be ending soon they
are currently under investigation, as in the outcome is still not known yet, so there is a case that
they might not be found guilty.

RESULTS
Manipulation Checks
I conducted two manipulation checks to verify that the decision task had been successfully
manipulated. First, I verified that pre-discussion individual accuracy was lower when participants
had incomplete information than when they had full information. Participants chose the superior
alternative before group discussion less often in the three experimental conditions where they had
incomplete information than in the control All-Info condition where they had all the information
items Wald 2 = 20.95, p 0.001. Second, the pre-discussion individual accuracy was not
significantly differently across the three experimental conditions where participants had incomplete information Wald 2 = 2.53, p 0.283.
The manipulation checks for the compensation contract involved participants having to answer three questions about their compensation contract correctly before they could begin the
experiment. The three questions tested participants on how their monetary reward was related to
the group accuracy, their own individual accuracy, and the individual accuracy of other members
in the group.14 This experimental procedure ensured that the compensation contracts were successfully manipulated.
Tests of Hypotheses
Decision Quality and Information Exchange
Descriptive statistics for decision quality and information exchange are presented in Table 2.
To test the significance of the differences in decision quality observed in Table 2, I performed a
logistic regression testing the effect of compensation contracts on group accuracy and a random
effects logistic regression testing the effect of compensation contracts on post-discussion individual accuracy.15 The logistic regression results presented in Table 3, Panel A, indicate that
compensation contracts Wald 2 = 7.25, p 0.027 and mean pre-discussion individual accuracy
of group members Wald 2 = 12.28, p 0.001 affected group accuracy.16 Likewise, the random
effects logistic regression results presented in Table 3, Panel B, indicate that compensation contracts F 5.31, p 0.007 and pre-discussion individual accuracy t 6.53, p 0.001 affected
post-discussion individual accuracy.
To test the significance of the differences in information exchange observed in Table 2, I
performed three overall ANOVAs with the number of common information items discussed, the
number of unique information items discussed, and the number of inference statements made as
the dependent variable in each ANOVA and compensation contracts as the categorical independent

14

15

16

Participants were asked whether: 1 the accuracy of their post-discussion individual decision, 2 the accuracy of the
other two group members post-discussion individual decisions, and 3 the accuracy of their group decision increased,
decreased, or did not affect their chance of winning the lottery.
A logistic regression is used instead of an overall ANOVA to test the effect of compensation contracts on decision
quality because group accuracy and post-discussion individual accuracy are dichotomous dependent variables. In addition, a random effects logistic regression is used for post-discussion individual accuracy because it controls for the
non-independence in the post-discussion individual accuracy of members that belong to the same group.
Pre-discussion individual accuracy was measured because prior research indicates that the pre-discussion preference of
group members is a key determinant of the post-discussion decision accuracy Greitemeyer and Schulz-Hardt 2003;
Winquist and Larson 1998. Therefore, the pre-discussion accuracy of individual group members can be controlled for
when testing the effects of compensation contracts on group accuracy and post-discussion individual accuracy.

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TABLE 2
Descriptive Statistics
Panel A: Decision Quality
Pre-Discussion
Individual
Accuracyb

Post-Discussion
Individual
Accuracyb

Group Accuracyb

Conditiona

Mean

Std.
Dev.

Mean

Std.
Dev.

Mean

Std.
Dev.

All-Info
Flat Wage
Group Incentive
Individual Incentive

42
54
48
48

0.69
0.35
0.21
0.29

0.47
0.48
0.41
0.46

14
18
16
16

0.71
0.61
0.50
0.19

0.47
0.50
0.52
0.40

42
54
48
48

0.74
0.56
0.50
0.17

0.45
0.50
0.51
0.38

Panel B: Information Exchangec


Number of
Common
Information
Items Discussedd
(maximum 9)

Number of Unique
Information Items
Discussedd (maximum 27)

Number of Inference Statements


Made (i.e., implications of
information)d

Condition

Mean

Std.
Dev.

Mean

Std. Dev.

Mean

Std. Dev.

Flat Wage
Group Incentive
Individual Incentive

18
16
16

5.94
7.19
5.44

1.73
2.46
2.25

9.72
12.75
8.38

3.80
5.77
5.43

25.17
25.13
19.25

8.51
10.95
9.13

The all-info condition was the control condition where a group member had all 12 information items per company and was entered into a lottery with a 1-in-3 chance of winning
$20 regardless of group or individual accuracy. In the three experimental conditions, a group member had six information items per company, of which three were common items
held by all three group members and three were unique items held by only one group member. In the flat wage condition, a group member was entered into a lottery with a 1-in-3
chance of winning $20 regardless of group or individual accuracy. In the group incentive condition, a group was entered into a lottery with a 1-in-3 chance of winning $60 to be
divided equally among the three group members if the group decision was accurate. In the individual incentive condition, a group member was entered into a lottery with a 1-in-3
chance of winning $20 if the post-discussion individual decision was accurate.
Participants made an individual decision before discussion, followed by a group decision and another individual decision after discussion, as to which company out of three
companies was the best financial investment. An accurate decision was coded as 1 and an inaccurate decision was coded as 0.

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The All-Info condition is excluded from Panel B because all information items were commonly held in that condition.
There were a total of 12 information items per company, of which three were common items held by all three group members and nine were unique items held by only one group
member with each group member holding three unique items. The group discussion transcripts were coded for: 1 number of common information items discussed; 2 number
of unique information items discussed; and 3 number of inference statements made i.e., implications of information, which included statements that drew conclusions about a
company, made assertions about the consequences arising from the given information, and expanded or elaborated on the given information.

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TABLE 3
Logistic Regressions of Decision Quality
Panel A: Logistic Regression with Group Accuracy as the Dependent Variable (n 50)
Estimate
Independent Variables
(Wald 2, p-value)
Intercept
Compensation Contracts:a
Individual Incentive
Group Incentive
Flat Wage
Mean pre-discussion individual
accuracy
Overall model evaluation:
Likelihood ratio test

4.50
12.29, 0.001
7.25, 0.027

3.21
6.34, 0.012
2.59
5.62, 0.018
7.66
12.28, 0.001
2 = 28.99, df 3, p 0.001

Panel B: Random Effects Logistic Regression with Post-Discussion Individual Accuracy as the
Dependent Variableb (n 150)
Estimate
Independent Variables
(t, p-value)
Intercept
a

Compensation contracts:
Individual Incentive
Group Incentive
Flat Wage

Pre-discussion individual
accuracy
a

4.98
4.23, 0.001
F 5.31, p 0.007

4.48
2.92, 0.004
4.26
2.88, 0.005
3.85
6.53, 0.001

The compensation contracts variable in the logistic regressions is a categorical variable comprised of the flat wage, the
group incentive, and the individual incentive. The individual incentive is used as the reference category in the logistic
regressions because the group incentive and the flat wage are contrasted against the individual incentive to test H1a/b
and H2a/b, respectively.
Random effects logistic regression is estimated using the GLIMMIX macro in SAS and the likelihood ratio test is not
available. See variable descriptions in Table 2.

variable. The type of compensation contract affected the number of common information items
discussed F 2.82, p 0.070 and the number of unique information items discussed F 3.19,
p 0.050, but not the number of inference items made F 2.08, p 0.137. Planned contrasts
are performed regardless of the omnibus ANOVA results as recommended by Rosenthal et al.
2000, 13.
Individual contrasts of decision quality and information exchange are conducted to test the
hypotheses. Hypothesis 1a predicts that information exchange and decision quality would not be
different between the group incentive and the individual incentive because both incentives provide
an economic motivation for information exchange. In contrast, H1b predicts that information
exchange and decision quality would be better under the group incentive than the individual
incentive because group membership is more salient under the group incentive than the individual

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incentive. The results for H1, presented in Panel A of Table 4, indicate that group accuracy Wald
2 = 6.34, p 0.012 and post-discussion individual accuracy t 2.92, one-tailed p 0.002
were better under the group incentive than the individual incentive. Groups also discussed more
common information items t 2.30, one-tailed p 0.013, unique information items t 2.46,
one-tailed p 0.009, and made more inference statements t 1.74, one-tailed p 0.044 under
the group incentive than the individual incentive. Therefore, H1b is supported whereas H1a is not
supported.
Hypothesis 2a predicts that information exchange and decision quality would be better under
the individual incentive than the flat wage because the individual incentive provides a stronger
economic motivation for information exchange than the flat wage. Conversely, H2b predicts that
information exchange and decision quality would be better under the flat wage than the individual
incentive because group membership saliency is lower under the individual incentive than the flat
wage. Since H2a and H2b have opposite directional predictions, two-tailed p-values are reported
for the contrasts used to test the hypotheses. The results for H2, presented in Panel B of Table 4,
indicate that group accuracy Wald 2 = 5.62, p 0.018 and post-discussion individual accuracy
t 2.88, p 0.005 were better under the flat wage than the individual incentive. Discussion of
common information items t 0.69, p 0.496 and unique information items t 0.78, p
0.439 were not significantly different between the flat wage and the individual incentive. However, the number of inference statements made was marginally higher under the flat wage than the
individual incentive t 1.80, p 0.078. The results support H2b and not H2a.
The results for the group incentive versus individual incentive contrasts and the flat wage
versus individual incentive contrasts suggest that the effects on information exchange and decision
quality are driven by group membership saliency rather than economic motivation.
Information Exchange Variables as Mediators
Hypothesis 3 posits that the effect of compensation contracts on decision quality is mediated
through information exchange. To test H3, the two essential steps outlined in Kenny et al. 1998,
260 to establish mediation are conducted. Step 1 tests whether the independent variable i.e., type
of compensation contract is related to the mediator i.e., information exchange variables. Step 2
tests that the mediator i.e., information exchange variables is in turn related to the dependent
variable i.e., decision quality, while controlling for the independent variable i.e., type of compensation contract. According to Kenny et al. 1998, 260, meeting these two essential steps
implies a relationship between the independent variable and the dependent variable, as well as a
reduction in the effect of the independent variable on the dependent variable after controlling for
the effect of the mediator on the dependent variable.17
The results for group accuracy as the dependent variable for decision quality are reported in
Table 5, Panel A. For Step 1, as reported in the earlier contrasts testing H1a/b and H2a/b, the
number of common information items, unique information items, and inference statements discussed are related to the type of compensation contract. For Step 2, logistic regressions are
conducted with group accuracy as the dependent variable and each of the information exchange
mediators as the independent variables, while controlling for the type of compensation contract
and the mean pre-discussion individual accuracy of the three group members. The number of
common information items discussed Model 1 in Panel A of Table 5: Wald 2 = 3.72, p 0.054
and the number of unique information items discussed Model 2 in Panel A of Table 5: Wald
2 = 4.01, p 0.045 are positively related to group accuracy. However, the number of inference
17

The tests of H1a/b and H2a/b establish that the independent variable i.e., type of compensation contract is related to
the dependent variable i.e., decision quality.

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TABLE 4
Planned Contrasts
Panel A: H1Group Incentive versus Individual Incentive
Variable
Result
Group accuracy
Post-discussion individual
accuracy
Number of common
information items discussed
Number of unique information
items discussed
Number of inference
statements made

Statistic

p-value

Group Individual
Group Individual

Wald 2 = 6.34
t 2.92

0.012
0.002 one-tailed

Group Individual

t 2.30

0.013 one-tailed

Group Individual

t 2.46

0.009 one-tailed

Group Individual

t 1.74

0.044 one-tailed

Panel B: H2Flat Wage versus Individual Incentive


Variable
Group accuracy
Post-discussion individual
accuracy
Number of common
information items discussed
Number of unique information
items discussed
Number of inference
statements made

Result

Statistic

p-value

Flat Individual
Flat Individual

Wald = 5.62
t 2.88

0.018
0.005

Flat Individual

t 0.69

0.496

Flat Individual

t 0.78

0.439

Flat Individual

t 1.80

0.078

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See variable descriptions in Table 2.

Panel A: Logistic Regressions with Group Accuracy as the Dependent Variable (n 50)
Model 1
Independent
Variables
Intercept
a

Compensation contracts:
Individual Incentive
Group Incentive
Flat Wage

Mean pre-discussion individual


accuracy
Common information items
discussed
Unique information items
discussed
Inference statements made

Model 3

Estimate
(Wald 2, p-value)

Estimate
(Wald 2, p-value)

Estimate
(Wald 2, p-value)

8.70
9.04, 0.003
5.73, 0.057

2.19
2.59, 0.108
2.81
5.59, 0.018
7.76
11.05, 0.001
0.67
3.72, 0.054

6.36
12.71, 0.001
5.32, 0.070

2.24
2.82, 0.093
2.54
5.07, 0.024
7.59
10.18, 0.001

5.64
10.99, 0.001
5.71, 0.058

2.87
4.88, 0.027
2.34
4.49, 0.034
7.32
10.63, 0.001

0.21
4.01, 0.045

2 = 34.42
df 4, p 0.001

0.06
1.63, 0.202
2 = 30.71
df 4, p 0.001

2 = 34.01
df 4, p 0.001

Panel B: Random Effects Logistic Regressions with Post-Discussion Individual Accuracy as the Dependent Variableb (n 150)
Model 1
Model 2
Independent
Variables
Intercept

Model 3

Estimate
(t, p-value)

Estimate
(t, p-value)

Estimate
(t, p-value)

10.64
3.87, 0.001

8.30
4.71, 0.001

8.25
4.53, 0.001
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Overall model evaluation:


Likelihood ratio test

Model 2

The Effects of Incentives

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TABLE 5
Logistic Regressions of Decision Quality
Information Exchange Variables as Mediators

Independent
Variables
Compensation contracts:a
Individual Incentive
Group Incentive
Flat Wage
Pre-discussion individual accuracy
Common information items
discussed
Unique information items
discussed
Inference statements made

Model 3

Estimate
(t, p-value)

Estimate
(t, p-value)

Estimate
(t, p-value)

F 4.02, p 0.021

3.13
1.88, 0.063
4.26
2.80, 0.006
3.91
6.54, 0.001
0.94
2.45, 0.016

F 3.84, p 0.025

3.12
1.95, 0.054
4.07
2.73, 0.007
3.94
6.52, 0.001

F 3.15, p 0.047

3.53
2.26, 0.026
3.34
2.23, 0.028
3.84
6.49, 0.001

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Panel B: Random Effects Logistic Regressions with Post-Discussion Individual Accuracy as the Dependent Variableb (n 150)
Model 1
Model 2

0.36
2.81, 0.006
0.17
2.47, 0.015

The compensation contracts variable in the logistic regressions is a categorical variable comprising of the flat wage, the group incentive, and the individual incentive. The
individual incentive is used as the reference category in the logistic regressions because the group incentive and the flat wage are contrasted against the individual incentive to test
H1a/b and H2a/b, respectively.
Random effects logistic regression is estimated using the GLIMMIX macro in SAS and the likelihood ratio test is not available. See variable descriptions in Table 2.

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statements made Model 3 in Panel A of Table 5: Wald 2 = 1.63, p 0.202 is not significantly
related to group accuracy. The type of compensation contract remains related to group accuracy in
all the logistic regressions all p-values 0.070, but its significance level decreases when the
information exchange mediators are included in the logistic regressions see Table 3, Panel A.
The results for post-discussion individual accuracy as the dependent variable for decision
quality are reported in Table 5, Panel B. Step 1 is reported as above. For Step 2, random effects
logistic regressions are conducted with the post-discussion individual accuracy as the dependent
variable and each of the information exchange mediators as the independent variables, while
controlling for the type of compensation contract and the pre-discussion individual accuracy. The
number of common information items discussed Model 1 in Panel B of Table 5: t 2.45, p
0.016, the number of unique information items discussed Model 2 in Panel B of Table 5: t
2.81, p 0.006, and the number of inference statements made Model 3 in Panel B of Table 5:
t 2.47, p 0.015 are positively related to post-discussion individual accuracy. The type of
compensation contract remains related to post-discussion individual accuracy in all the logistic
regressions all p-values 0.047, but its significance level decreases with the inclusion of the
information exchange mediators in the logistic regressions see Table 3, Panel B.
In summary, the results support H3. The effect of compensation contracts on decision quality
is partially mediated through information exchange.
Additional Analyses: Trust
In the discussion of the psychological effect of group versus individual incentive H1b, I
argue that increased group membership saliency under the group incentive promotes trust in
fellow group members and trust encourages people to share information. In a post-experiment
question, participants used a 0 absolutely do not trust to 10 absolutely trust scale to rate the
level of trust in their fellow group members to present truthful information during the group
discussion. The following analyses are conducted to assess the impact of compensation contracts
on trust, and the relationship between trust and information exchange.
The ANOVA results indicate that the type of compensation contract is not related to trust F
1.88, p 0.156. Following the recommendation of Rosenthal et al. 2000, 13, planned
contrasts mirroring H1a/b and H2a/b are performed irrespective of the omnibus ANOVA result.
Participants reported a higher level of trust in their fellow group members under the group incentive mean 9.00, std. dev. 1.11 than the individual incentive mean 8.52, std. dev. 1.35
t 1.94, one-tailed p 0.027. Trust did not differ significantly between the flat wage mean
8.78, std. dev. 1.16 and the individual incentive mean 8.52, std. dev. 1.35 t 1.07, p
0.286.
Regression analyses indicate that mean trust of members in a group is positively related to the
number of common information items discussed t 2.07, p 0.044 and the number of unique
information items discussed t 3.44, p 0.001. Mean trust of members in a group is not related
to the number of inference statements made t 0.96, p 0.343.
The results are consistent with the group incentive engendering greater trust in fellow group
members as compared to the individual incentive, and trust being positively related to increased
information exchange. However, in this study, trust was measured after rather than before the
group discussion to avoid priming the participants. As such, it is difficult to determine whether
trust precedes, follows, or develops concurrently with information exchange.
DISCUSSION AND CONCLUSION
Information for effective decision-making is often distributed among different people in a
firm, due to either inherent differences in knowledge, experience, and expertise, or the design of

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the information systems. Prior research indicates that decision quality is often impaired under such
a scenario because decision makers do not adequately consider unique information but focus more
on commonly held information. This study examines how different compensation contracts flat
wage, group incentive, and noncompetitive individual incentive affect information exchange and
judgment performance in such group decision-making settings.
First, I find that information exchange and decision quality are better under the group incentive than the individual incentive. This is despite both incentives providing an economic motivation for information exchange. Second, information exchange and decision quality are better under
the flat wage than the individual incentive, although the individual incentive provides a stronger
economic motivation for information exchange. These results suggest that psychological rather
than economic forces better explain the effect of compensation contracts on decision quality in a
group decision-making context. Third, the effect of compensation contracts on decision quality is
partially mediated through information exchange. The type of compensation contract affects the
extent of information exchange, which in turn influences decision quality.
The results in this study highlight the importance of considering the nature of the work and
the costs and benefits of different incentive systems when adopting performance-contingent pay. In
a decision-making task where information that could improve decision quality is distributed
among different individuals and information exchange is essential, a group-based incentive and a
flat wage may outperform an individual-based incentive, even when it is mutually beneficial to
cooperate under the individual-based incentive. An individual-based incentive, which emphasizes
individual performance and reduces the salience of group membership, could reduce information
exchange among employees even when there is an economic incentive for information exchange.
This study has several limitations. First, this study uses anonymous and computer-mediated
discussions. In reality, people working in groups are not anonymous, often interact face-to-face,
and may have established relationships from prior interactions. Many other variables such as
demographic variables, social context cues, verbal and nonverbal communication cues, prevailing
relationships, and career concerns may influence the group decision-making and information exchange process and moderate the effect of incentives. Second, this study examines only a group
decision-making task where group members are highly interdependent in the task. The results may
not generalize to other group tasks with varying degrees of task interdependencies among group
members. Third, although the study finds that trust in fellow group members is positively related
to information exchange, it is unable to determine the causal directions between trust and information exchange because trust is measured after group discussion. Prior research has shown that
trust and acts of trust have reciprocal relationships e.g., Coletti et al. 2005; Butler 1999; Boss
1978; Zand 1972. The type of compensation contract may affect the initial level of trust, which
influences the quantity and quality of information exchange, which in turn affect the further
development of trust.

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