J Bus Ethics (2019) 154:127–145
https://doi.org/10.1007/s10551-017-3459-9
ORIGINAL PAPER
Peer Influence on Managerial Honesty: The Role of Transparency
and Expectations
Markus Brunner1 • Andreas Ostermaier1
Received: 29 September 2016 / Accepted: 1 February 2017 / Published online: 18 February 2017
 Springer Science+Business Media Dordrecht 2017
Abstract We investigate peer influence on managerial
honesty under varying levels of transparency. In a labora-
tory experiment, managers report their costs to a superior
to request budget. We manipulate whether the managers
learn each other’s report and cost (full transparency) or the
report but not the cost (partial transparency). The results
show, first, that managers are susceptible to peer influence,
as they join peers in reporting honestly and dishonestly
both under full and partial transparency. Second, however,
the effect of peer influence is asymmetric. While man-
agers’ dishonesty increases much when peers’ reports are
higher than they have expected, the opposite is not true.
Third, partial transparency reinforces this asymmetry in
peer influence. Unlike full transparency, it allows managers
to substitute self-serving assumptions for missing infor-
mation and to thus justify their own dishonesty more easily.
The contribution of this study is twofold: It provides evi-
dence for the interaction between transparency and peer
influence and it highlights the role of (disappointed)
expectations in fueling dishonesty. Our findings warn firms
that especially partial transparency may spread dishonesty
more than honesty. Transparency may also hurt firms that
push honesty norms (as in ethics codes) but fail to enforce
compliance, thus raising and disappointing managers’
expectations.
& Markus Brunner
markus.brunner@tum.de
Andreas Ostermaier
andreas.ostermaier@tum.de
1
TUM School of Management, Technische Universität
München, Arcisstraße 21, 80333 Munich, Germany
Keywords Honesty  Motivated reasoning  Peer
influence  Reporting  Social norms  Transparency
Introduction
Managerial honesty is crucial for firms, which rely on
managers’ reports to allocate valuable resources. Man-
agers, however, can often benefit from misreporting
information. Managers’ honesty is arguably influenced by
their peers in the firm, who offer examples of honest or
dishonest behavior. We investigate the effect of peer
influence on managerial honesty under varying levels of
transparency, leaving managers with more or less infor-
mation about their peers and especially their peers’ hon-
esty. While transparency can provide managers with
enough information to assess each other’s honesty (Car-
dinaels and Jia 2016; Paz et al. 2013), firms create partial
more often than full transparency, because they can only
disclose the information that they have (e.g., managers’
reports of the costs, but not the actual costs). We find that
partial transparency, compared to full transparency, exac-
erbates the influence of peers’ dishonesty, as managers
complement incomplete information about their peers with
self-serving assumptions to justify their own dishonesty.
Internal reporting is a primary example of the relevance
of honesty in firms. Managers submit reports to superiors to
request budget. For instance, they report the costs of
planned activities to claim funding. The very need for
reporting arises because managers know their costs, while
superiors do not. As managers submit their reports, they
have an incentive to overstate their costs to create slack—
that is, an excess of resources over the minimum that is
necessary to accomplish their tasks. Excess resources can,
for example, enhance a manager’s status, provide him with
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non-essential perquisites (travel expenses, company cars,
lavish office furniture), permit him to reduce his effort to
achieve his targets, or allow him to contract more
employees than necessary (Antle and Eppen 1985). For
firms, in turn, slack is a waste of valuable resources (Clor-
Proell et al. 2015).1 As managers lie about their costs to
build slack into their budget requests, slack can be con-
sidered a measure of managerial dishonesty in reporting
(Evans et al. 2001).
In firm hierarchies, we usually have several managers
who submit reports to the same superior to request budget.
Internal reporting is therefore potentially susceptible to the
influence of peers to the extent that managers’ behavior is
made transparent to each other. The literature offers in fact
multiple examples of peer influence under transparency in
business settings. For instance, transparency about peers’
performance can improve individual performance. Man-
agers strive to meet or beat the standard set by their peers,
although relative performance information, unlike relative
performance evaluation, does not even relate their pay to
peer performance (Tafkov 2013; Hannan et al. 2013).
Relative performance information can also increase or
decrease honesty, depending on how it is presented (Brown
et al. 2014). As another example, auditors have been found
to approach moral dilemmas differently after discussing
them with peers, as the discussion reveals information
about their peers’ moral reasoning (Thorne and Hartwick
2001).
In internal reporting, transparency allows managers to
learn about the honesty of their peers, who establish stan-
dards or descriptive norms by reporting honestly or dis-
honestly (Bicchieri 2006). The related evidence on peer
influence (as in relative performance evaluation) suggests
that managers follow their peers’ reporting behavior when
they can observe it. However, research on social norms
shows that peer influence is not necessarily symmetric,
because people conform to self-interested more easily than
to socially interested behavior (Cialdini and Trost 1998;
Emett et al. 2015). Paz et al. (2013) find, in the laboratory,
that transparency, especially when peers’ reports are dis-
honest, leads managers to report dishonestly. With a sim-
ilar manipulation, Cardinaels and Jia (2016) find that
transparency increases honesty, if combined with audits.
Unlike Paz et al., they do not find an effect of peer influ-
ence alone, neither positive nor negative. Evans et al.’s
(2016) finding that managers collude against the firm under
open internal reporting also suggests that transparency
fosters dishonesty rather than honesty.
Conformity with peer behavior implies that managers
report (dis)honestly depending on whether their peers
1
Clor-Proell et al. (2015) refer to the unauthorized use of firm
resources for the personal benefit of the employee as fraud.
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M. Brunner, A. Ostermaier
report (dis)honestly (Cialdini and Trost 1998). Appraisals
of honesty are subjective, though, because most reports are
neither fully honest nor fully dishonest, but partially honest
(Evans et al. 2001). A manager who has high expectations
about honesty may be surprised about how much slack a
peer’s partially honest report implies, while another man-
ager may find the same report unexpectedly honest. Hence,
we need to know managers’ expectations to understand
how they respond to some report. Moreover, a peer’s report
alone does not provide enough information for a manager
to know that peer’s honesty. For example, high budget
requests can reflect high costs, but may also dishonestly
overstate costs to build up slack. Transparency about costs
allows managers to ascertain their peers’ actual dishonesty.
Without this information, they have room for speculation
and self-serving conjectures. Contingent on their expecta-
tions and on the information that transparency reveals,
managers may interpret and respond to the same report
quite differently.
To derive our hypotheses, we consider a setting where
managers have an incentive to overstate their costs as they
request budget. As managers learn each other’s report, they
can ascertain or estimate how much slack their peers cre-
ate, depending on whether they know their peers’ costs.
Drawing on the literature on social norms, we argue, first,
that managers condition their slack on their peers’ slack or,
if they do not know the costs, their peers’ reports. We
predict that managers’ slack increases in their peers’ slack
or reports. Second, building on the argument that motivated
reasoning leads people to conform more easily to self-
serving behavior, we expect asymmetry in peer influence:
Managers adopt dishonest more readily than honest
behavior. Hence, we contend that managers’ slack increa-
ses much in their peers’ slack or reports when their peers’
reports turn out higher than expected but decrease little
when they are lower than expected. Third, we hypothesize
that this asymmetry is larger under partial than under full
transparency, which allows more motivated reasoning.
When managers do not know their peers’ costs, they can
easily impute that their peers maximize slack when these
submit high reports.
We conduct a laboratory experiment to test our predic-
tions, where two managers report their costs to one supe-
rior.2 The superior cannot verify the managers’ reports,
who therefore can build up slack. We manipulate whether
the managers learn each other’s report and cost (full
transparency) or the report but not the cost (partial trans-
parency). Thus, either manager has more or less exact
information about his or her peer’s dishonesty. The
2
When talking about the first and second manager, we refer to the
former with female pronouns and to the latter with male pronouns for
convenience.
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations
managers report one after the other, so that the second
manager can condition his report on the first manager’s
(presumed) dishonesty. Moreover, we have either manager
state his or her expectation about the other’s report before
he or she learns it, so that we know whether the report is
higher or lower than expected. This design permits us to
study both the dynamics of lying and the role of expecta-
tions. Our analysis focuses on the second manager, who
estimates first his peer’s report, then learns that report, and
finally submits his own report.
The results of our experiment confirm our predictions.
First, we find that managers’ slack increases in the slack
created by their peers (rather than their peers’ reports)
under full transparency. Under partial transparency, they
use reports as proxies for slack and condition their slack on
those reports instead. Second, managers’ slack increases
more in their peers’ slack or reports when their peers’
reports are higher—or more dishonest—than expected,
which implies that dishonesty influences managers more
than honesty. Third, this asymmetry is larger under partial
than under full transparency. That is, an unexpectedly high
report increases peer influence more when the actual cost is
not revealed, which allows managers to suspect dishonesty.
The third finding supports the argument that managers
succumb to motivated reasoning when they lack informa-
tion, resulting in higher dishonesty. We also note that the
influence of the peer with whom a manager is interacting at
some point fades over time. As managers interact repeat-
edly with different peers, their behavior is driven by their
past interactions rather than their current interaction.
This study contributes in different ways to the bur-
geoning literature on peer influence on honesty. First, it
elucidates how peer influence interacts with transparency.
Transparency allows managers to observe and imitate peer
behavior. Prior research suggests that managers conform to
peer behavior when they learn about it, and that they
conform more readily to self-interested behavior. We find
these effects both under partial and full transparency.
Partial transparency, however, reinforces the asymmetry in
managers’ response, because it allows them to substitute
self-serving assumptions for missing information. Second,
our study highlights the role of expectations, which are a
benchmark for managers to assess their peers’ honesty.
Managers respond more to peers’ dishonesty once it
exceeds their expectations. Without this benchmark, man-
agers’ response to peer behavior is hard to interpret. The
elicitation of expectations, which is possible in the labo-
ratory, may help future research to reconcile mixed prior
evidence on peer influence in reporting.
Similar to our experiment, firms can adopt policies to
increase transparency, such as open internal reporting, in
which managers learn other managers’ reports (Evans et al.
2016). Firms should be aware then that transparency can
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backfire, as it reveals both ethical and unethical behavior.
In particular, partial transparency creates ambiguity
because of the information that is not disclosed. Managers
fill this gap with assumptions which are biased by their
own interests rather than based on the facts that they know.
Firms should therefore be careful with policies that result
in partial transparency. As another managerial implication,
managers’ strong response to unexpectedly high reports
warns firms not to first fuel and then disappoint expecta-
tions. In fact, firms manage employees’ expectations as
they commit to injunctive norms, as in ethics codes. The
combination of these norms with transparency may lead
managers with high expectations to realize that their peers
defect. Transparency makes it therefore even more
important to enforce such codes and punish defection.
The remainder of this article proceeds in four steps. We
first provide theoretical background and derive our
hypotheses (Sect. 2) and then describe the design of our
experiment (Sect. 3). Next, we report our results (Sect. 4),
which we discuss in conclusion (Sect. 5).
Hypotheses
Conformity with Peer Behavior
Managerial honesty has attracted considerable attention in
research. While honesty is certainly, to a large extent, a
matter of personal preferences, this research has shown that
honesty also depends on contextual factors, which the firm
can control. For example, precise information systems have
been found to reduce honesty compared to coarse systems,
which allow managers the joint benefit of appearing honest
and lying moderately (Hannan et al. 2006). There is also
evidence that a mode of budget communication that obliges
managers to make—potentially untruthful—factual asser-
tions to request budget elicits their honesty preferences and
leads them to create less budgetary slack (Rankin et al.
2008; Douthit and Stevens 2015). These findings are
interesting because they suggest that, despite classical
economic theory, managers are willing to sacrifice mone-
tary benefits in order to be or appear honest, and firms can
benefit from these preferences if they design their infor-
mation and reporting systems accordingly (Evans et al.
2001).
While studying contextual factors, prior research on
honesty has been largely confined to dyadic principal–
agent relationships, where the agent has better information
and can therefore lie to the principal for his or her own
benefit. For example, in Rankin et al. (2008) single man-
agers can create budgetary slack at owners’ expense. Some
laboratory studies rely on participants as principals (Rankin
et al. 2008; Douthit and Stevens 2015), whereas the
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experimenter takes the part of the principal in others
(Evans et al. 2001; Cardinaels and Jia 2016). The studies
with participants as principals account for the fact that
there is a social element to lying: managers want to appear
honest to their superior rather than to themselves. The few
studies that involve peers show that managers are more
inclined to lie if dishonesty benefits not only themselves
but also their peers, which makes lying more justifiable
(Church et al. 2012; Maas and van Rinsum 2013; Evans
et al. 2016).
However, peer influence is often more subtle. Research
in psychology offers compelling evidence that people
conform to behavior that they observe in others, even when
this is not in their immediate self-interest (Deutsch and
Gerard 1955). For example, people follow fads or fashions
without the prospect of being rewarded for doing so or of
being punished otherwise (Bicchieri 2006). Peer behavior
establishes descriptive norms, which can be more powerful
than injunctive norms (Cialdini and Trost 1998). As a
matter of fact, the force of descriptive norms becomes
especially salient when they conflict with injunctive norms.
For example, field experiments show that people tend to
litter in littered areas. While they know that one ought not
to litter, they infer that littering is the norm and readily
adopt it (Cialdini et al. 1991). Similarly, other field
experiments have shown that violations of norms, like
graffiti, unreturned shopping carts, or illegal parking, cause
people to violate the same and even other norms (Keizer
et al. 2008).
Conformity to peer behavior can be motivated by dif-
ferent reasons. Descriptive norms provide guidance in
uncertain or ambiguous situations, where peer behavior
conveys valuable information that would be costly to
acquire (Deutsch and Gerard 1955; O’Fallon and Butter-
field 2012). For example, an accountant might prefer to
approach a reporting problem like an experienced col-
league because it would be time-consuming to explore or
test alternative approaches or mistakes might be conse-
quential for the firm (Bicchieri 2006). Conformity appears
in these cases as an inexpensive shortcut. Another motive
for conformity is the desire to reciprocate or the desire to
avoid social disapproval (Fehr and Falk 2002). Noncon-
formity can raise questions about the motives for deviating
from the norm or attract undesired attention or scorn,
which causes psychological costs (Fischer and Huddart
2008). To avoid these costs, people often prefer to comply
even with opinions or behaviors that they disapprove of
personally (Bicchieri 2006).
Managers who request budget find themselves usually in
a situation where different norms conflict. For example,
although the injunctive norm says that one ought to tell the
truth, this norm is not necessarily descriptive of reporting
in firms. Prior evidence suggests that managers—even
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M. Brunner, A. Ostermaier
without peer influence—submit untruthful reports and
create slack, which benefits them at the expense of the firm.
Budget requests therefore also raise questions about fair-
ness. Whether a manager considers it fair or unfair to build
up slack, fairness concerns matter (Fehr and Schmidt
1999). In such an ambiguous situation, managers will
appreciate guidance. Hence, the creation of slack by peers
serves them as a cue about whether and how much slack to
create (Bicchieri 2006). Of course, peers can guide man-
agers in either direction: An honest peer reminds me of the
truth-telling norm and leads me to reflect on what is fair
toward the firm, given the benchmark established by my
peer. Conversely, the model of a dishonest peer is a con-
venient excuse for me to follow my self-interest.
While prior research has focused on the relationship
between the single manager and the superior, we have
mostly several managers who report to one superior. As
these managers work on similar tasks and communicate
with each other informally, they may well have better
information than their superior about each other. For
example, while the superior must rely on the managers’
reports, the managers may be able to ascertain their peers’
actual costs. As firms promote transparency (e.g., with
open internal reporting), managers may thus end up with
enough information to assess their peers’ honesty. For
convenience, we consider a parsimonious full-transparency
setting where two managers report their costs to one
superior to request budget for their investments. The
managers know each other’s cost and learn each other’s
report, whereas the superior must trust the reports. The
managers can therefore lie to the superior by overstating
their costs to create slack. However, either manager can
easily determine the other manager’s slack, turning slack
into a measure of the peer’s dishonesty.
Research on peer influence and honesty in reporting
has explored similar settings, where managers learn the
reports of peers who face the same costs, so that they can
infer their peers’ honesty from their reports (Paz et al.
2013; Cardinaels and Jia 2016). While the results are not
conclusive, they still argue for an effect of peer influence
on honesty. Paz et al. (2013) find that peer influence leads
to an erosion of honesty over time, compared to managers
not being informed about their peers’ reports. Cardinaels
and Jia (2016) show in turn that the example of honest
peers increases managers’ honesty, albeit only in combi-
nation with audits. There is also related research which
shows that both dishonesty and honesty are contagious
(Innes and Mitra 2013). Taking together this evidence, we
expect that managers will condition their own dishonesty
on that of their peers. Hence, managers who see their
peers misreport their costs to create slack will follow their
example, and so will managers who see their peers report
honestly.
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations 131

Hypothesis 1a When managers learn both the reports and variety of experiments, which do not suggest, though, that
the costs of their peers, managers’ slack increases in the this effect can easily be inverted by exemplary honesty
slack created by their peers. (Gino et al. 2009; Innes and Mitra 2013; Rauhut 2013;
Diekmann et al. 2015). More generally, there is much
While managers may have better information about their
evidence that people are easily led to violate injunctive
peers than their superior, they still have partial more often
norms if they observe violations by others or believe that
than full information. For example, they may be in a better
violations are common (Keizer et al. 2008; Cialdini et al.
position than their superiors to estimate their peers’ costs,
1991; Rauhut 2013), but little evidence on opposite
but do not observe these costs and still have to estimate
dynamics. Exceptions include studies on tax compliance or
them. To model this situation, we modify our full-trans-
energy savings (Wenzel 2004; Schultz et al. 2007). Taken
parency setting in that either manager, under partial
together, these outcomes suggest that conformity with self-
transparency, knows the peer’s report but not the cost.
interested norms dominates conformity with socially
Managers who want to know about their peers’ honesty
interested norms. Motivated reasoning and expectations
then have to make inferences from the data available to
explain the behavioral underpinnings of this asymmetry
them. For instance, low reports clearly infer honesty,
(Emett et al. 2015).
because everyone would request enough budget to cover
Research on motivated reasoning shows that people
their costs. High reports, in turn, may overstate low costs,
collect and evaluate information in the light of the con-
but may also reflect high costs. Provided that managers
clusions that they want to reach (Kunda 1990). If a piece of
know the distribution of their peers’ costs (which is similar
information allows for different readings, they prefer the
to their own), they can still form expectations about the
reading that supports their desired conclusion, and they
slack contained in their peers’ reports (i.e., the expected
may even disregard, overlook, or reinterpret conflicting
amount of slack for a given report). Managers can thus use
information (Gilovich 1991). Evidence for motivated rea-
their peers’ reports as proxies to compensate their lack of
soning among analysts, auditors, investors, management
information about their peers’ costs.
accountants, and tax professionals is pervasive (Bradshaw
Prior evidence supports indeed the contagion effect of
et al. 2016; Kadous et al. 2013; Fanning et al. 2015;
dishonesty under partial transparency. For example, Diek-
Bloomfield and Luft 2006; Kadous et al. 2008). For
mann et al. (2015) had participants in an experiment cast
example, Tayler (2010) shows that motivated reasoning
dice, paid them for their reported number, and informed
compromises the effectiveness of balanced scorecards in
them about the numbers reported by others. Dishonesty
management accounting. Managers who are involved in
could not be detected because participants cast their dice
selecting initiatives have a motivation to perceive these
individually. Participants knew the theoretical distribution
initiatives as successful. As a result, they exploit the wiggle
of outcomes, but could not observe their peers’ actual
room that balanced scorecards provide in interpreting
outcomes. This is similar to a setting with partial trans-
performance data to overrate initiatives that they have
parency, where managers learn their peers’ reports but not
selected.
the costs underlying these reports. As participants saw their
Internal reporting offers ample room for motivated
peers claim numbers above the theoretical outcome, they
reasoning, as self-interest motivates managers to misreport
also reported higher numbers in subsequent rounds. Other
their costs and build up slack despite any preference for
experiments in psychology add further evidence that dis-
honesty that they may have. Dishonest peers are therefore
honesty under partial transparency is contagious (Gino
a welcome excuse to managers to justify their own dis-
et al. 2009). Based on this evidence, we expect that man-
honesty. Hence, managers will readily create slack if they
agers condition their slack on their peers’ reports rather
see their peers create slack. Conversely, if they see their
than their peers’ slack (as in Hypothesis 1a) when they
peers report honestly, they can still discount this infor-
know their peers’ reports but not their costs.
mation as irrelevant for their own decision or argue to
Hypothesis 1b When managers learn the reports but not themselves that their own situation is different from those
the costs of their peers, managers’ slack increases in their of their peers. Partial transparency increases the room for
peers’ reports. motivated reasoning even more as managers know their
peers’ reports, but not their costs. Looking for information
Asymmetric Responses to Peer Behavior that tells them that their peers lie as much as or even more
than themselves, managers will readily assume that any
Prior research has focused on the contagiousness of dis- report above the minimum cost contains slack. In partic-
honesty more than on the potential contagiousness of ular, high reports can be interpreted to indicate dishon-
honesty. Dishonesty has thus been found to increase in esty, although such reports may just as well reflect high
response to models or descriptive norms of dishonesty in a costs.

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132 M. Brunner, A. Ostermaier

To understand how managers respond to peers’ reports, increases more in their peers’ slack or reports (depending
it is important to know whether they consider some report on whether cost information is transparent) when they
honest or dishonest. This distinction is not obvious, discover that their peers’ reports exceed their initial
because perfectly honest or dishonest reports, which fall expectations.
clearly in either one category, are rather the exception. By
Hypothesis 2a When managers learn both the reports and
contrast, most managers end up with partially honest
the costs of their peers, managers’ slack increases more in
reports that trade off the costs against the benefits of lying
the slack created by their peers if their peers’ reports are
(Evans et al. 2001). They will not be surprised, therefore,
unexpectedly high.
to see their peers submit partially honest reports, or assume
that reports are partially honest if they do not know the Hypothesis 2b When managers learn the reports but not
actual costs. Unlike a perfectly honest or dishonest report, the costs of their peers, managers’ slack increases more in
however, a partially honest report may be perceived as their peers’ reports if their peers’ reports are unexpectedly
honest by some managers but dishonest by others, high.
depending on personal preferences for honesty. Managers’
Hypotheses 2a and 2b predict an asymmetry in the
expectations about peers’ reports offer a useful benchmark
effects of peer influence: Peer influence is stronger when
of whether they find these reports honest. Specifically,
managers are negatively surprised by their peers’ dishon-
managers arguably consider reports honest that are lower
esty than when they are not. The hypotheses predict similar
than they have expected, whereas unexpectedly high
effects both under partial and under full transparency,
reports appear dishonest.
because motivated reasoning and expectancy violations are
Psychological theory suggests that reports which are
possible in both conditions. However, partial transparency
inconsistent with managers’ expectations induce particu-
provides more room for motivated reasoning than full
larly strong responses (Burgoon and Burgoon 2001).
transparency. For example, suppose that a manager sees his
Drawing on Expectancy Violations Theory, Clor-Proell
peer submit a high report. If that manager knows that this
(2009) shows that the same accounting choices lead users
report reflects a high cost, it is hard for him to use it as an
of the accounting information to more extreme—both
excuse for dishonesty. As he seeks evidence to justify
positive and negative—assessments of the credibility of the
dishonesty, the insight that his peer is or at least appears
firm if these choices mismatch users’ expectations than if
honest is inconvenient and causes cognitive dissonance
they match their expectations. Emett et al. (2015) apply
(Epley and Gilovich 2016; Kunda 1990). To resolve this
this theory to a different setting, as they analyze how
dissonance, the manager can change his behavior (i.e.,
managers conform to descriptive norms established by
report honestly), find arguments to justify it, or ignore the
their peers. Because of the combination of expectancy
inconvenient information (Festinger 1957).
violations with motivated reasoning, they find that man-
People are inventive in finding arguments that are
agers are more likely to conform to observed peer behavior
consistent with their goals (Gino et al. 2016). For exam-
that deviates from their expectations (i.e., what they
ple, the manager might argue that his peer is really dis-
assume to be the norm) when their peers are unexpectedly
honest, but that she cannot create slack because her cost
selfish than when they are unexpectedly unselfish. Selfish
is too high already to be overstated. He might also argue
behavior is a more salient cue of the descriptive norm than
that this specific honest peer is not representative of the
unselfish behavior (Bicchieri 2006).
general population, construe potential differences between
Prior research on the influence of peers on honesty
him and his peer that allow him to be dishonest although
provides indirect support for motivated reasoning and
his peer is apparently honest, or consider his peer’s slack
asymmetric responses to descriptive norms. Paz et al.
in relative versus absolute terms, whatever makes her
(2013) find that, when managers are informed about all
appear more dishonest. However, any attempt to reconcile
their peers’ honesty—including honest and dishonest
the contradictory evidence with his plans and to thus
peers—honesty erodes over time more than when they are
dissolve the dissonance is psychologically costly (Kunda
not informed. This finding suggests that managers prefer to
1990). Ignorance about the peer’s cost can therefore
adopt their dishonest peers’ rather than their honest peers’
simplify the manager’s life considerably. If he does not
behavior when they observe both. Related sociological
know the cost underlying her report, he can easily suspect
research on honesty shows that people who find out that
that her report contains much slack, at least if it is high,
they have underestimated others’ lying increase their own
which makes it a good pretense for him to claim much
lying much while those who have overestimated it decrease
slack as well.
their own lying little (Rauhut 2013). Taking together the
Experimental evidence highlights people’s preference
motivated reasoning and expectancy violations arguments
for ignorance in moral dilemmas, which saves them from
with this prior evidence, we predict that managers’ slack

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Peer Influence on Managerial Honesty: The Role of Transparency and Expectations
coping with cognitive dissonance. In modified dictator
games, Dana et al. (2007) find that participants capitalize
on any uncertainty about the—potentially bad—conse-
quences of their actions to act self-interestedly rather than
fairly. Specifically, Dana et al. leave decision-makers
(dictators) uncertain about whether the choice that is in
their own interest helps or hurts another person (the
responder). However, they allow them to reveal the con-
sequences of their choice without any cost, so that they can
make an informed decision. Most dictators forego this
chance and choose the self-interested option, presumably
persuading themselves that they happen to be in the state of
the world where this choice helps rather than hurts the
responder. Several studies have confirmed that people
consider self-interested actions under willful ignorance to
be less indicative of egoism (Feiler 2014; Gino et al. 2016;
Grossman and van der Weele 2016).
While ignorance may often be convenient, it is not
always available. People, including managers, sometimes
cannot avoid learning facts that are inconsistent with their
goals. We consider settings where managers either know or
do not know each other’s cost, but where they cannot
choose whether or not to know it. Nevertheless, the
implications of the finding that people prefer ignorance in
moral dilemmas and act more self-interestedly if they can
remain ignorant about the consequences remains valid in
these settings: People prefer ignorance because it gives
them more moral wiggle room, and if they have this wiggle
room—although not willfully—they will naturally use it
(Epley and Gilovich 2016). Compared to full transparency,
partial transparency gives managers additional room for
motivated reasoning, which exacerbates the asymmetry in
their response to surprisingly high reports. We expect
therefore that the asymmetry in managers’ responses is
even larger under partial transparency than under full
transparency.
Hypothesis 3 An unexpectedly high report increases peer
influence more under partial than under full transparency.
Experiment
We conduct a laboratory experiment to test our predictions.
Participants are 174 students from a large European uni-
versity, whom we recruit through ORSEE (Greiner 2015).
The participants are on average 23.66 years old (SD 3.40),
and 69% of them are male. During the experiment, the
participants are separated by partitions and interact
anonymously through a computer network that we pro-
grammed in z-Tree (Fischbacher 2007). Either condition
involves three sessions of about 1 h, for a total of six
sessions. Participants are remunerated with €1 for every 14
133
experimental currency units (ECU) earned. Overall, the
remuneration averages about €15.3
Task
We consider a firm that consists of one superior and two
managers. Either manager realizes an investment. The
costs of both investments are independently and uniformly
distributed between 20 and 100 ECU. Both investments
together yield a random profit, which is uniformly dis-
tributed between 160 and 240 ECU and which is inde-
pendent of the costs. The cost and profit sequences were
randomly drawn in advance and then remained the same
for all conditions and sessions of the experiment so that we
can compare managers’ slack and reports across conditions
(Rankin et al. 2008; Paz et al. 2013).
Either manager has 200 ECU to fund his or her invest-
ment. The managers fund their costs and report them to the
superior. The superior refunds the managers’ costs and
keeps the profit, which has an expected value of 200 ECU,
provided that both managers report their costs truthfully.
The managers are then left with 200 ECU each, and the
superior’s expected payoff is 200 ECU. If the managers
overstate their costs to create slack, they keep the slack in
addition to their 200 ECU, while the superior’s expected
payoff is reduced by the slack. This design ensures that it is
unfair for the managers to cheat the superior to the extent
that the (expected) payoffs would be equal without cheat-
ing. Hence, the managers cannot argue that they need to lie
to their superior to reach equal payoffs, which reduces the
pressure to lie.
The distributions of the costs and of the profit are
common knowledge. The superior observes the joint rev-
enue from both investments, but not the costs. Either
manager observes his or her cost, but not the revenue.
Hence, neither the superior nor the managers observe the
actual profit. As a result, the superior cannot know how
much slack the managers create. By contrast, the managers
learn each other’s report and, depending on the level of
transparency, which we manipulate, each other’s cost.
They can therefore estimate or, if they know each other’s
cost, ascertain each other’s slack. The superior’s and
managers’ instructions are reprinted in the appendix.
The managers submit their reports successively, so that
the second manager can respond to the first manager’s
3
To establish a benchmark for our results, we also conduct a no-
transparency condition, where managers learn neither each other’s
report nor cost. The no-transparency condition involves another three
sessions with 90 participants. Comparisons between the no-trans-
parency condition and our experimental conditions did not yield any
meaningful insights. We thus exclude the data and related tests for
brevity.
123
134
report. Either manager makes an incentivized estimate of
the other manager’s report before learning this report. The
estimate can earn the manager 6–30 ECU if it is within
5–0 ECU off the other manager’s report. Likewise, the
superior makes an incentivized estimate of either man-
ager’s report before receiving the reports. Either estimate
can earn the superior 3–15 ECU. To avoid tacit strategic
cooperation, we inform participants individually about
their estimation task, so that they do not know about oth-
ers’ estimation tasks. (Otherwise, the managers could
always report a cost of 100 ECU and estimate their peers’
reports at 100 ECU to maximize their payoffs conve-
niently. Even the superiors could benefit from such an
equilibrium by also estimating the managers’ reports at
100 ECU.)
Manipulation
We manipulate, between-subjects, how much information
the managers have about each other. The mangers learn
either both their peer’s report and cost or the report but not
the cost. Depending on the level of transparency, the
managers know more or less about each other’s dishonesty.
Under full transparency, where the managers know each
other’s actual cost and learn each other’s report, they can
easily calculate their peer’s slack by subtracting the cost from
the report. Specifically, the first manager anticipates that the
second manager knows her dishonesty before submitting her
own report. Conversely, the second manager can condition his
own report on the first manager’s dishonesty because he
submits his report only after learning her report and cost.
Under partial transparency, where the managers learn
each other’s report but not cost, they cannot know their
peer’s slack. However, knowing the distribution of their
peer’s cost, they can still estimate the slack. In particular,
low reports are evidence for honesty, because the report
must not understate the cost. High reports do not neces-
sarily imply dishonesty, but they raise at least suspicions.
Knowing that the expected cost is 60 ECU, the managers
can always use their peer’s report to obtain an estimate of
his or her honesty.
While the information available to the managers varies
with transparency, both managers eventually receive the
same information within either condition, although not at
the same time. The manager who reports second learns his
peer’s report before submitting his own, whereas the
manager who reports first learns her peer’s report only after
submitting her own. The peer’s cost is disclosed from the
beginning to either manager in the full-transparency con-
dition, while it is never disclosed in the partial-trans-
parency condition. At the end, both managers have the
same information, knowing either both each other’s report
and cost or only each other’s report.
123
M. Brunner, A. Ostermaier
Time Line
The experiment consists of a total of six sessions, which
take about 1 h each. At the beginning of the session, par-
ticipants are randomly assigned as superior, first manager,
or second manager. They keep their roles throughout the
experiment.
The participants first receive general instructions, which
apply across roles. They then take a quiz to make sure that
they understand the instructions. Only after passing the
quiz, they learn whether they are a superior or a manager.
Finally, they learn, in private, about their estimation task.
The experiment extends over ten rounds. At the begin-
ning of each round, participants are randomly rematched
into firms, which each consist of a superior, a first manager,
and a second manager. Random rematching does not pre-
clude repeated interaction, but makes it very unlikely that
the same participants interact in consecutive rounds.
Hence, a manager cannot reasonably assume that the peer
(or superior) he is interacting with in any round is the same
as in the previous or next round.4 The sequence of events is
the same in each round:
1. Both managers learn their own and, depending on the
level of transparency, the other manager’s cost.
2. The first manager submits her report to the superior.
The second manager learns this report.
3. The second manager submits his report to the superior.
The first manager learns this report.
4. The superior learns the joint revenue of both invest-
ments and refunds to the managers their reported costs.
The superior estimates either manager’s report before
receiving it. Likewise, either manager estimates the other
manager’s report before learning this report.
The experiment concludes with exit questions to collect
demographic data. After that, one of the ten rounds is
randomly chosen to determine participants’ remuneration.
The remuneration combines the payoffs from the manager’
reports (i.e., the slack that the managers create) and from
the incentivized estimates of the reports.
Results
Summary Analysis
The key variables to measure peer influence between the
two managers are their reports to the superior and the slack
4
This design choice rules out that managers observe the same peer
over time, which would allow them to make inferences about this
peer’s honesty from trend-based slack signals. The quiz includes
questions which make sure that participants understand random
rematching.
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations 135

that they build into these reports. Following prior research,
we measure slack as a percentage (slack claimed over slack
available) to account for the fact that the maximum level of
slack available (in ECU) differs between managers and
rounds (Evans et al. 2001; Douthit and Stevens 2015). If a
manager reports his or her cost truthfully, slack is 0%. On
the contrary, lying to the maximum extent by reporting a
cost of 100 ECU results in a slack of 100%. Slack is thus a
direct measure of a manager’s (dis)honesty. Table 1 dis-
plays the means and standard deviations of slack and the
reports by condition (full and partial transparency) for each
type of manager. In addition, Table 1 lists managers’ and
superiors’ payoffs as well as the average cost.
The data show that both managers create slack in either
condition. The reports vary around 90 ECU, which is
above the average cost of 60 ECU but below the maximum
report of 100 ECU. Although the managers lie about their
costs, they refrain from maximizing slack. On average,
their reports include a slack of 70–80%. While truthful
reports would leave them with a payoff of 200 ECU and
the superior with an expected payoff of 200 ECU, they thus
increase their payoffs at the superior’s expense. It is
noteworthy that there is little variation between conditions.
In particular, the first manager creates about the same
slack, no matter whether it will be disclosed to the second
manager, and variation in the second manager’s slack and
reports is small as well. However, most of our predictions
refer to variations within the conditions, depending on
whether the managers face higher or lower transparency.
Our last hypothesis is about differences between conditions
in how the second manager processes information about his
peer.
Figure 1, which depicts both managers’ slack over time
for either condition, adds more details to the summary
statistics in Table 1. We see that slack creation is similar
for both managers and conditions over time. Starting at
50–60%, slack increases quickly at the beginning to grow
at a lower pace toward the end. Under partial transparency,
the second manager’s slack is generally lower than his
peer’s, resulting in less slack on average (73% as opposed
to 79%). The first and second manager’s slack turn out to
be closely associated in both conditions. Under partial
transparency, in particular, the second manager follows
hard on his peer, increasing and decreasing slack as she
does. This is noteworthy, given the independent distribu-
tions of the costs and the second manager’s ignorance of
his peer’s slack. In line with our theory, the figure suggests
that the second manager infers his peer’s slack from her
report and that peer influence is stronger under partial
transparency. Under full transparency, in turn, the second

Table 1 Summary statisticsa

Full transparencyb Partial transparencyc

Manager 1 Manager 2 Superior Manager 1 Manager 2 Superior

Slackd (%) 76.19 77.01 78.84 73.02

(30.70) (28.69) (27.72) (34.37)
Report (ECU) 90.88 90.20 90.88 88.73
(12.16) (11.83) (11.57) (13.97)
Payoffe (ECU) 231.18 230.60 138.32 231.18 229.13 139.79
(12.16) (11.83) (8.36) (11.57) (13.97) (8.32)
Costf (ECU) 59.70 59.60 59.70 59.60
Participantsg (#) 30 30 30 28 28 28
a
The table reports means and, in parentheses, between-subject standard deviations
b
Under full transparency, the managers learn both each other’s report and cost, so that they can infer their
peer’s slack
c
Under partial transparency, the managers learn each other’s report but not cost, so that they can only
estimate their peer’s slack
d
Slack in percentage is the slack claimed by the manager relative to the maximum slack that the manager
can create ð¼ ðreported cost  actual costÞ=ð100  actual costÞ  100Þ
e
The manager’s payoff equals 200 ECU plus the manager’s level of slack (in ECU). The superior’s payoff
equals the joint revenue from both investments less the costs that the managers report. The expected payoff
is 200 ECU less the level of slack (in ECU) created by Managers 1 and 2
f
The cost is uniformly distributed between 20 and 100 ECU. We have two different cost sequences, one
for either type of manager. The cost sequence remains the same within either type of manager, so the
between-subjects standard deviation is 0. The cost sequences do not vary between conditions
g
With two managers who report to one superior, we have the same number of first managers, second
managers, and superiors. The total number of participants in the two conditions is 90 and 84

123
136 M. Brunner, A. Ostermaier

Fig. 1 Manager 1’s and Full transparency Partial transparency

Manager 2’s slack over time. 90
(Slack in percentage is the slack
claimed by a manager relative
to the maximum slack that the
manager can create ð¼
ðreported cost  actual costÞ= 80
ð100  actual costÞ  100Þ: The
figure depicts the mean slack
created by Manager 1 and

Slack (%)
Manager 2 by condition and 70
round. In the full-transparency
condition, the managers learn
both each other’s report and
cost, so that they can infer their
peer’s slack. In the partial- 60
transparency condition, the
managers learn each other’s
report but not cost, so that they
can only estimate their peer’s 50
slack.)
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Round

Manager 1 Manager 2

manager even claims about the same percentage of slack,
but the association fades over time.
Hypothesis Tests
Hypothesis 1a contends that, under full transparency,
managers’ slack depends on how much slack their peers
create. To test this prediction, we examine the second
manager, who knows both his peer’s report and cost when
he submits his own report, and who can thus infer how
much slack his peer’s report contains. We regress the
manager’s slack on the slack created by his peer. Specifi-
cally, we run a mixed-effects regression with random
effects on the subject level to account for within-subject
dependency of the observations. In a second regression, we
add the round and the manager’s cost as covariates to
control for potential time effects and differences in slack
creation conditional on cost levels. We also include the
peer’s report to test whether it has an additional effect that
is not captured by slack. For example, the manager might
respond differently to the same amount of slack depending
on whether his peer’s report is high or low.5
Table 2 lists the results, which provide weak support for
Hypothesis 1a. Panel A shows that, without covariates, the
manager’s slack increases by 0.15 percentage points for a
1-percentage point increase in his peer’s slack (z ¼ 3:85,
5
As a numerical example, suppose that the first manager creates a
slack of 50%. The second manager, who observes his peer’s slack of
50%, might increase his own slack more when his peer’s report is
80 ECU (for a cost of 60 ECU) than when it is 60 ECU (for a cost of
20 ECU).
p\0:001). When we include the manager’s cost, his peer’s
report, and the round as covariates, this effect falls just
short of being significant in a two-tailed test (z ¼ 1:62,
p ¼ 0:105) according to Panel B. Given our directional
prediction, however, the result is significant under a one-
tailed test. The manager’s slack increases significantly over
time (see Sect. 4.3 for a more detailed analysis). By con-
trast, the peer’s report has no effect beyond slack, and
neither has the manager’s cost. Hence, the manager’s
response to his peer’s slack does not depend on whether
this slack is created with a high or low report. The manager
responds to the outcome (i.e., the peer’s slack) rather than
the action that leads to this outcome (the report), provided
that he knows the outcome.
Hypothesis 1b states that, under partial transparency,
managers’ slack increases in their peers’ reports. Hypoth-
esis 1a implies that managers consider their peers’ out-
comes rather than the actions that result in these outcomes.
Under partial transparency, however, managers cannot
observe the outcomes, but they can observe the actions.
Hypothesis 1b suggests that managers rely on their peers’
observable actions as proxies for the unobservable out-
comes. We consider again the second manager, who learns
his peer’s report but not cost and thus cannot infer how
much slack she has built into her report. We run a mixed-
effects regression of the manager’s slack on the peer’s
report and then include, in a follow-up regression, the
manager’s cost and the round as covariates. The results,
which are reported in Table 3, confirm our prediction: For
a 1-ECU increase in his peer’s report, the manager’s slack
increases by 0.34 percentage points without control

123
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations
Table 2 Peer influence under
Dependent variable: Manager 2’s slackb
full transparencya
Panel A: Without control variables
Slackc
Constant
Panel B: With control variables
Slackc
Reportd
Coste
Round
Constant
a
The table reports the results of a mixed-effects regression with random effects on the subject level to
account for within-subject dependency of the observations (n ¼ 30, over 10 rounds). The p-values are two-
tailed
b
Slack in percentage ð¼ ðreported cost  actual costÞ=ð100  actual costÞ  100Þ
c
Manager 1’s slack in percentage
d
Manager 1’s reported cost
e
Manager 2’s cost
variables (z ¼ 4:78, p\0:001, Panel A), or 0.29 percentage
points with control variables (z ¼ 4:13, p\0:001, Panel
B). The effects of the manager’s cost and round are similar
to those in Panel B of Table 2.
The tests of Hypotheses 1a and 1b show that managers
respond to their peers’ slack or reports when this infor-
mation is available. Following up on these results,
Hypotheses 2a and 2b predict that managers’ responses are
(asymmetrically) stronger when they see their peers’
reports exceed their expectations. To test these claims, we
add to the regressions from Tables 2 and 3 a dummy
variable (‘‘surprise’’), which is 1 if the second manager has
underestimated his peer’s report, and 0 else. We interact
this dummy variable with the peer’s slack or report to
capture how much the effect of her slack or report increases
when this report turns out higher than expected. Table 4
depicts the results.
From the estimates in Panel A, the second manager’s
slack increases, under full transparency, by an additional
0.22 percentage points for a 1-percentage point increase in
his peer’s slack when the peer’s report is higher than
expected (z ¼ 1:76, p ¼ 0:078), compared to an increase of
0.08 percentage points when it is not. In fact, only the
increase of 0.22 percentage points is significant. This result
explains why peer influence turns out barely significant in
Panel B of Table 2, which does not account for the man-
ager’s expectation. Again, only the round but neither the
peer’s report nor the manager’s cost has a significant
additional effect on slack. Similarly, Panel B shows that,
under partial transparency, the manager’s slack increases
significantly more—by 2.17 additional percentage points—
in his peer’s report when this report is unexpectedly high
(z ¼ 3:66, p\0:001). However, the manager’s slack also
137
Slope z-statistic p-value
0.15 3.85 \0.001
65.79 11.11 \0.001
0.10 1.62 0.105
0.06 0.44 0.662
0.03 0.40 0.689
1.40 2.70 0.007
54.74 5.04 \0.001
increases in his peer’s report when it is not higher than
expected (0.32, z ¼ 4:34, p\0:001). Again, the manager’s
slack increases in the round, but not in his cost.6 In sum-
mary, these results corroborate both Hypotheses 2a and 2b:
Peer influence is significantly stronger when peers’ (pre-
sumed) dishonesty is higher than expected. Hence, dis-
honesty influences managers more than honesty.
Figure 2 illustrates how slack is related to managers’
expectations. The figure depicts the second manager’s
slack along with the mean values of the surprise variable
for both conditions. The variable surprise, which is
between 0 and 1, is rescaled for comparison. Looking at the
figure, it is noteworthy that, in the partial-transparency
condition, slack is apparently associated with surprise over
the first seven rounds. Whenever surprise increases, slack
follows. However, slack increases more easily than it
decreases, and when surprise drops in rounds 3 and 6, slack
falls only slightly. This observation aligns well with the
asymmetry hypothesis. In the full-transparency condition,
the association between slack and surprise appears weaker
and is confined to the first four rounds. More generally, we
see slack increase and surprise decrease over time. As
managers lower their expectations about peers’ honesty,
they are harder to surprise and respond less when their
expectations turn out wrong.
Hypotheses 2a and 2b draw on the argument that man-
agers succumb to motivated reasoning. They readily use a
6
Untabulated tests of Hypotheses 2a and 2b without control
variables confirm these results. Under full transparency, the coeffi-
cients are 0.12 for Slack (z ¼ 2:98, p ¼ 0:003) and 0.23 for Slack 
Surprise (z ¼ 1:82, p ¼ 0:068); under partial transparency, the
coefficients are 0.36 for Report (z ¼ 5:10, p\0:001) and 2.26 for
Report  Surprise (z ¼ 3:80, p\0:001).
123
138 M. Brunner, A. Ostermaier

Table 3 Peer influence under

Dependent variable: Manager 2’s slackb Slope z-statistic p-value
partial transparencya
Panel A: Without control variables
Reportc 0.34 4.78 \0.001
Constant 42.24 4.65 \0.001

Panel B: With control variables

Reportd 0.29 4.13 \0.001
Coste 0.01 0.23 0.818
Round 1.35 2.93 0.003
Constant 38.09 4.01 \0.001
a
The table reports the results of a mixed-effects regression with random effects on the subject level to
account for within-subject dependency of the observations (n ¼ 28, over 10 rounds). The p-values are two-
tailed
b
Slack in percentage ð¼ ðreported cost  actual costÞ=ð100  actual costÞ  100Þ
c
Manager 1’s reported cost
d
Manager 2’s cost

Table 4 Asymmetry in peer

Dependent variable: Manager 2’s slackb Slope z-statistic p-value
influencea
Panel A: Full-transparency condition
Slackc 0.08 1.21 0.225
Surprised -16.15 -1.40 0.162
c d 0.22 1.76 0.078
Slack  Surprise
Reporte 0.02 0.17 0.868
Costf 0.02 0.27 0.778
Round 1.58 2.83 0.005
Constant 58.46 5.17 \0.001
Panel B: Partial-transparency condition
Reporte 0.32 4.34 \0.001
Surprised -220.19 -3.77 \0.001
Reporte  Surprised 2.17 3.66 \0.001
f 0.01 0.10 0.921
Cost
Round 0.91 1.91 0.056
Constant 40.45 4.33 \0.001
a
The table reports the results of a mixed-effects regression with random effects on the subject level to
account for within-subject dependency of the observations (n ¼ 30 in the full-transparency condition and
n ¼ 28 in the partial-transparency condition, over 10 rounds). The p-values are two-tailed
b
Slack in percentage ð¼ ðreported cost  actual costÞ=ð100  actual costÞ  100Þ
c
Manager 1’s slack in percentage
d
Surprise equals 1 if Manager 1’s report is higher than Manager 2’s expectation of this report, and 0
otherwise
e
Manager 1’s reported cost
f
Manager 2’s cost

high slack or report as a pretense to create slack. Con-
versely, they are more reluctant to report truthfully just
because peers’ reports are or seem to be truthful. However,
partial transparency provides more room for motivated
reasoning than full transparency. Hypothesis 3 maintains
therefore that, when peers’ reports are higher than expec-
ted, peer influence increases more under partial than under
full transparency. Put differently, we expect a larger
asymmetry in peer influence under partial than under full
transparency.
We combine the regressions from Panels A and B of
Table 4 to compare the asymmetries in peer influence. To
measure peer influence, we create a variable that reflects
the effect of slack under full transparency and the effect of

123
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations
Full transparency
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8
Slack
Fig. 2 Manager 2’s slack and surprise over time. (Slack in percent-
age is the slack claimed by a manager relative to the maximum slack
that the manager can create ð¼ ðreported cost  actual costÞ=ð100
actual costÞ  100Þ: The figure depicts the mean slack created by
Manager 2 by condition and round. In any given round, surprise
the report but not slack under partial transparency.
Specifically, the variable peer influence equals the first
manager’s slack in the full-transparency condition and the
first manager’s report in the partial-transparency condition.
As the report is measured in ECUs, whereas slack is
measured in percentage, we standardize both variables to
combine them. The report is standardized over both con-
ditions, while slack is standardized only within the full-
transparency condition, where it is observable by managers
and susceptible to influence them.7 Furthermore, we
introduce the variable full transparency to differentiate
between the conditions, which is 1 if the managers learn
both each other’s reports and costs, and 0, if they learn each
other’s reports but not the costs.
We run a mixed-effects regression over both conditions
and construct two-way and three-way interactions of peer
influence with surprise and full transparency. We thus
disentangle the effects of the peer’s slack and report both
under full and partial transparency and both when the
peer’s report is unexpectedly high and when it is not. As in
Table 4, we include the manager’s cost, the peer’s report,
7
Specifically, we consider all reports by type-1 managers to calculate
the mean and standard deviation to standardize the report. Con-
versely, we only use the slack percentages of type-1 managers in the
full-transparency condition to standardize slack.
139
Partial transparency
9 10 1 2 3 4 5 6 7 8 9 10
Round
Surprise
equals 1 if Manager 1’s report is higher than Manager 2’s expectation
of this report, and 0 otherwise. The figure depicts the mean of surprise
in percentage, which is the percentage of type-2 managers who have
underestimated their peer’s report in each round.)
and the round as covariates. The report can only have an
additional effect under full transparency, since the variable
peer influence already comprises the report in the partial-
transparency condition. The variables report and full
transparency are interacted to capture this additional effect.
Panel A of Table 5 depicts the results of the regression,
where the coefficients are standardized. Panel B summa-
rizes the simple main effects of peer influence under full
and partial transparency, both when the manager is nega-
tively surprised by his peer’s report and when he is not.
Panel A highlights, again, the asymmetry in peer influ-
ence under partial and full transparency. The positive
interaction between peer influence and surprise (1.00,
z ¼ 3:26, p ¼ 0:001) shows that, under partial trans-
parency, managers’ slack increases more in their peers’
reports when these exceed their expectations. In Panel B,
this effect corresponds to the difference between 1.14 and
0.14. Likewise, Panel B shows that, under full trans-
parency, managers’ slack increases more in their peers’
slack when their peers’ reports are higher than expected
(0.31 vs. 0.08), and this difference is again significant
(0.23, z ¼ 1:91, p ¼ 0:057, untabulated). More impor-
tantly, the results in Panel A confirm Hypothesis 3, which
maintains that the asymmetry in peer influence is larger
under partial transparency than under full transparency
(that is, 1:00 [ 0:23). This prediction is confirmed by the
123
140 M. Brunner, A. Ostermaier

Table 5 Effect of transparency

Dependent variable: Manager 2’s slackb Effect z-statistic p-value
on asymmetry in peer influencea
Panel A: Regression results
Peer influencec 0.14 3.83 \0.001
Surprised -0.58 -3.62 \0.001
Full transparencye 0.05 0.22 0.824
Peer influencec  Surprised 1.00 3.26 0.001
Peer influencec  Full transparencye -0.06 -0.83 0.408
Peer influencec  Surprised  Full transparencye -0.78 -2.34 0.019
f e 0.01 0.23 0.816
Report  Full transparency
Costg 0.01 0.27 0.785
Round 0.09 3.41 0.001
Constant -0.01 -0.10 0.923
Panel B: Simple main effects of peer influence
Full transparencye ¼ 1
Peer influencec if Surprised ¼ 1 0.31 2.42 0.015
c d 0.08 1.39 0.163
Peer influence if Surprise ¼ 0
Full transparencye ¼ 0
Peer influencec if Surprised ¼ 1 1.14 3.74 \0.001
c d 0.14 3.83 \0.001
Peer influence if Surprise ¼ 0
a
The table reports the results of a mixed-effects regression with random effects on the subject level to
account for within-subject dependency of the observations (n ¼ 58, over 10 rounds). The coefficients are
standardized. The p-values are two-tailed
b
Slack in percentage ð¼ ðreported cost  actual costÞ=ð100  actual costÞ  100Þ
c
Peer influence equals Manager 1’s slack (in percentage) in the full-transparency condition and Man-
ager 1’s reported cost in the partial-transparency condition. The report is standardized over both conditions,
while slack is standardized only within the full-transparency condition
d
Surprise equals 1 if Manager 1’s report is higher than Manager 2’s expectation of this report, and 0
otherwise
e
Full transparency equals 1 for managers in the full-transparency condition and 0 in the partial-trans-
parency condition
f
Manager 1’s reported cost
g
Manager 2’s cost

significant three-way interaction between peer influence,
surprise, and full transparency in Panel A of Table 4
(0:78, z ¼ 2:34, p ¼ 0:019), which captures the dif-
ference in the asymmetries. Hence, we find support for
Hypothesis 3.
As an additional result, Panel B shows that the effect of
peer influence is larger under partial than under full trans-
parency, both when the peer’s report is higher than expected
(1:14 [ 0:31) and when it is not (0:14 [ 0:08). However,
the difference in the effects of peer influence between partial
and full transparency is only significant when the manager is
surprised (0.83, z ¼ 2:51, p ¼ 0:012, untabulated). Hence,
partial transparency, as opposed to full transparency,
increases not only the asymmetry in peer influence, but also
the effect of peer influence per se, provided that the peer’s
(presumed) dishonesty is higher than expected.
Against the backdrop of increasing transparency, this
finding may warn firms to be careful in crafting trans-
parency policies. It seems that more transparency does not
monotonously translate into more honesty. Instead, the
latter result suggests at least that dishonesty spreads faster
under partial transparency, which affords more room for
motivated reasoning than full transparency. Firms that
promote transparency should be aware of this detrimental
effect of partial transparency. However, this implication
must be seen in the context of the largely invariant out-
comes reported in Table 1. While managers are apparently
more susceptible to adopt peers’ dishonest behavior under
partial transparency than under full transparency, the
impact on firm outcomes is arguably small. Managers
eventually create about the same amount of slack under full
and partial transparency.

123
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations 141

Additional Analyses Turning first to the partial-transparency condition, Panel

Peer influence occurs naturally as people respond to the
behavior that they observe in others. The dynamic design
of our experiment, where managers report one after the
other, gives the second manager the opportunity to respond
to the first manager’s report. To explore in more detail how
managers’ behavior evolves over time, we further investi-
gate the round effects in the regressions reported in
Table 4. In particular, we model two-way and three-way
interactions of the round with slack and surprise under full
transparency. We thus estimate how the effects of slack,
both when the peer’s report is higher than expected and
when it is not, changes over the rounds. Under partial
transparency, we create similar interaction terms between
the round with the report and surprise. Panel A of Table 6
reports the results under full transparency, Panel B, under
partial transparency.
B shows a significant effect of the peer’s report on the
second manager’s slack when the peer’s report is as
expected or lower (0.59, z ¼ 4:35, p\0:001). However,
this effect decreases by 0.06 in each round (z ¼ 2:40,
p ¼ 0:016). Likewise, the additional increase of the second
manager’s slack in his peer’s report when it is higher than
expected is significant at the beginning (4.35, z ¼ 4:23,
p\0:001), but falls in each round by 0.78 (z ¼ 2:76,
p ¼ 0:006). Panel A reports similar but insignificant effects
under full transparency: With peer influence being weaker
under full transparency per se, the interaction with the
round leaves all effects of interest insignificant on a per-
round basis. Taken together, we see the effect of peer
influence fade over time. More generally, our results sug-
gest that the influence of the peer with whom a manager is
interacting at a given point in time decreases as the man-
ager gains experience by interacting with multiple peers.

Table 6 Effect of timea

Dependent variable: Manager 2’s slackb Slope z-statistic p-value

Panel A: Full-transparency condition

Slackc 0.12 1.20 0.232
Surprised -26.05 -1.57 0.117
Round 1.60 1.49 0.137
c d 0.24 1.23 0.218
Slack  Surprise
Slackc  Round -0.01 -0.42 0.677
Surprised  Round 4.88 0.92 0.358
c d -0.03 -0.56 0.574
Slack  Surprise  Round
Reporte 0.00 -0.01 0.995
Costf 0.01 0.14 0.889
Constant 60.40 5.00 \0.001
Panel B: Partial-transparency condition
Reporte 0.59 4.35 \0.001
Surprised -443.19 -4.39 \0.001
Round 5.73 2.74 0.006
Reporte  Surprised 4.35 4.23 \0.001
Reporte  Round -0.06 -2.40 0.016
d 78.78 2.80 0.005
Surprise  Round
e d -0.78 -2.76 0.006
Report  Surprise  Round
f -0.04 -0.77 0.439
Cost
Constant 20.77 1.62 0.105
a
The table reports the results of a mixed-effects regression with random effects on the subject level to
account for within-subject dependency of the observations (n ¼ 30 in the full-transparency condition and
n ¼ 28 in the partial-transparency condition, over 10 rounds). The p-values are two-tailed
b
Slack in percentage ð¼ ðreported cost  actual costÞ=ð100  actual costÞ  100Þ
c
Manager 1’s slack in percentage
d
Surprise equals 1 if Manager 1’s report is higher than Manager 2’s expectation of this report, and 0
otherwise
e
Manager 1’s reported cost
f
Manager 2’s cost

123
142
While managers’ slack increases less and less in response
to their direct peers, we see an (insignificant) increase of
1.60 in each round under full transparency and of 5.73
(z ¼ 2:74, p ¼ 0:006) under partial transparency, which is
independent of any particular peer.
While our analysis focuses on the second manager, who
is influenced by the first manager he is interacting with in
some round, we also find evidence for peer influence of the
second manager on the first manager across rounds. To
elicit these peer effects, we examine whether the first
manager’s slack creation in any given round is driven by
the second manager’s slack or report from the previous
round. Untabulated results show that the first manager’s
slack increases in her previous peer’s slack under full
transparency (0.14, z ¼ 2:06, p ¼ 0:040) or her previous
peer’s report under partial transparency (0.14, z ¼ 2:08,
p ¼ 0:038).8 This finding indicates, on the one hand, that
the first manager, as much as the second manager, is sus-
ceptible to peer influence. On the other hand, it suggests
indirect contagion effects, which go beyond the specific
interaction between two managers: Rather than respond to
the peer she is interacting with, the first manager increases
or decreases slack in the subsequent period, thus influ-
encing yet another manager. As managers interact repeat-
edly with peers, one manager’s dishonesty may thus
multiply and spread. While our experiment is not designed
to explore these dynamics of peer influence, our observa-
tions suggest possible avenues for further research.
Conclusion
This article investigates peer influence on managerial
honesty under varying levels of transparency. Our results
suggest that managerial honesty is susceptible to peer
influence. Specifically, we find that managers follow their
peers in creating more or less slack. However, the effect of
peer influence is asymmetric: The influence of dishonesty
is larger than that of honesty, because managers use their
peers’ dishonesty to justify their own. Managers’ slack thus
increases much when peers’ reports are higher than
expected but decreases little when they are not. This
asymmetry is larger under partial than under full trans-
parency, as partial transparency allows managers to com-
plement missing information with self-serving
assumptions: When they do not know their peers’ costs,
they can conveniently attribute high reports to dishonesty
rather than high costs. As a result, managers increase their
8
Specifically, we run mixed-effects regressions for both conditions,
where we control for the manager’s cost and the round. In the full-
transparency condition, we include, again, the second manager’s
report from the previous period in addition to his slack.
123
M. Brunner, A. Ostermaier
slack under partial transparency more readily than under
full transparency in the case where peers’ reports turn out
higher than expected.
This study highlights how peer influence on managerial
honesty depends on the level of transparency. Trans-
parency allows managers’ behavior to be influenced by
peers as they can observe peer behavior. However, the
effect of peer influence is larger under partial than under
full transparency. While both full and partial transparency
lead managers to adopt dishonest more than honest
behavior, partial transparency increases this asymmetry.
These findings suggest that firms should be careful with
transparency policies in two regards. First, transparency
sheds light both on honest and dishonest behavior, and
dishonest behavior is more contagious. Second, the ambi-
guity that partial transparency creates as it reveals some
information, while other information remains concealed,
again promotes dishonesty, as it allows managers to sub-
stitute convenient assumptions for missing information. It
should be noted, though, that managers’ slack and superi-
ors’ payoffs eventually vary little between the different
levels of transparency that our experiment employs.
Expectations are the second key element of our exper-
iment. Managers’ reports are usually partially honest rather
than either fully honest or fully dishonest, and this is what
managers expect from their peers. However, managers vary
in how much dishonesty they expect. If a peer’s report,
given the actual or presumed cost, is higher than expected,
the manager likely finds that peer dishonest. As the man-
ager has incentives to be dishonest, he readily takes his
peer’s dishonesty as a pretense to lie. Expectations can thus
help researchers understand managers’ response to peers’
reports. Expectations are also interesting from a managerial
viewpoint. While we do not manipulate managers’ expec-
tations, firms arguably do, as they push ethics codes and
similar normative guidelines. Our findings suggest that
such codes may backfire as they change managers’ (initial)
expectations but not necessarily behavior. Hence, if the
firm promotes honesty, it must make sure that managers
abide by these norms to avoid heavy responses to disap-
pointed expectations.
Our study is limited to the key elements to identify peer
influence on honesty. We see several promising paths for
further research. First, future studies might introduce
injunctive norms (e.g., an ethics code) to manipulate
managers’ expectations and to further examine how
expectations and norms interact. It would also be intriguing
to include controls that have been found to interact with
ethical behavior and especially honesty (e.g., Rankin et al.
2008; Tayler and Bloomfield 2011; Cardinaels and Jia
2016). These extensions would, in particular, permit a test
of our conjecture that ethics codes backfire unless they are
combined with controls to ensure compliance. Finally, our
Peer Influence on Managerial Honesty: The Role of Transparency and Expectations
experiment is confined to the minimum of two managers to
study peer influence, whereas prior studies have used more
peers to establish descriptive norms (Paz et al. 2013;
Cardinaels and Jia 2016). To confirm the robustness of our
findings and to explore further dynamics in peer influence,
we believe that it would be desirable to manipulate the
number of peers.
Compliance with Ethical Standard
Informed Consent Informed consent was obtained from all indi-
vidual participants included in the study.
Ethical Approval All procedures performed in this study that
involved human participants were in accordance with the ethical
standards of the institutional and/or national research committee and
with the 1964 Helsinki Declaration and its later amendments or
comparable ethical standards.
Appendix: Instructions
Welcome
In this experiment, you’ll take decisions that affect other
participants. You will stay anonymous, though. No one will
learn how you have decided. Data will not be linked to you
but only to your terminal.
Please observe the experimenter’s instructions. Do not
talk and switch off or mute your mobile devices. If you
have any questions, raise your hand. The experimenter will
come to you and answer your questions quietly.
All information that you need will be displayed on your
screen. You will not be deceived. After the experiment,
only the decisions that you take based on this information
will be analyzed.
Remuneration
You can earn money in this experiment. The currency is
ECU instead of Euro. The conversion rate is:
14 ECU ¼ 1 Euro:
You will be remunerated in private and in cash at the end
of the experiment. The other participants will not learn how
much money you have made.
Overview
The participants have different tasks. One-third of the
participants are owners, two-thirds are managers.9 One
owner and two managers make a firm.
9 or her cost. The second manager also learns this report.
The owner is referred to as superior in the article.
143
You are randomly assigned as owner or manager. You stay
either as an owner or as a manager throughout the experiment.
The experiment consists of 10 rounds. In each round,
participants are randomly rematched into firms. You will
not learn the identity of the other people in your firm. You
will never be in a firm with the same participants in two
subsequent rounds, though.
At the end of the experiment, you will take a ques-
tionnaire at your terminal. Your answers are supposed to
help us interpret your decisions.
Task
In each round, either manager realizes an investment.
Either investment can cost a random amount of 20, 21, 22,
..., 100 ECU. All values are equally likely. The costs of
both investments are independent of each other.
The profit from the investments is random. Depending on
the market situation, the joint profit from both investments
can be 160, 161, ..., 240 ECU. All values are equally likely.
The profit is independent of the costs of the investments.
Either manager has 200 ECU to fund the cost of his or her
investment. The owner refunds the costs from the revenue of
the investments. The owner keeps the profit, which varies
with the market situation, but is 200 ECU on average.
The owner learns the joint revenue of both investments,
but not their actual costs. The managers know the costs of
their investments, but not the revenue.
Either manager submits a report on his or her own cost
to the owner. Either manager can report his or her cost
truthfully or untruthfully overstate his or her cost. The
owner refunds the reported costs.
Sequence of Events (Full-Transparency Condition)
Each round proceeds as follows:
1. Either manager learns both his or her own and the
other manager’s cost.
2. The first manager submits to the owner a report on his
or her cost. The second manager also learns this report.
3. The second manager submits to the owner a report on
his or her cost. The first manager also learns this report.
4. The owner learns the joint revenue from both invest-
ments and refunds to the managers their reported costs.
Sequence of Events (Partial-Transparency Condition)
Each round proceeds as follows:
1. Either manager learns his or her cost.
2. The first manager submits to the owner a report on his
123
144 M. Brunner, A. Ostermaier

3. The second manager submits to the owner a report on
his or her cost. The first manager also learns this report.
4. The owner learns the joint revenue from both invest-
ments and refunds to the managers their reported costs.
Payoffs
Your estimate can earn you money. The payoff from
estimating the report depends on how accurate your esti-
mate is.
The following table shows how the difference between
your estimates and the reports translates in payoffs. All
values in the table are in ECU.

The owner’s and managers’ payoffs result from the man- Difference between 0 1 2 3 4 5 [±5
agers’ reports (all values are in ECU): estimate and report

• Owner’s payoff = Payoff 30 24 18 14 10 6 0

Revenue from both investments
– First manager’s reported cost The remuneration results from the payoffs from estimating
– Second manager’s reported cost; the reports in 1 round of the 10 rounds. This round is
• Manager’s payoff = randomly drawn.
200
? Manager’s reported cost
- Manager’s actual cost.
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