| Abstract: |
Controlling employees can have severe consequences in situations that are not
fully contractible. However, the perception of control may be contingent on
the nature of the relationship between principal and agent. We, therefore,
propose a principal-agent model of control that takes into account social
identity (in the sense of Akerlof and Kranton, 2000, 2005). From the model and
previous literature, we conclude that a shared social identity between the
principal and agent has both a cognitive, that is, belief-related, and a
behavioral, that is, performance-related, dimension. We test these theoretical
conjectures in a labor market experiment with perfect monitoring. Our ndings
confirm that social identity has important implications for the agent's
decision-making. First, agents who are socially close to the principal
(in-group) perform, on average, more on behalf of the principal than socially
distant (no-group) agents. Second, social identity shapes the agent's
subjective expectations of the acceptable level of control. In-group agents
expect to experience less control than no-group agents. Third, an agent's
reaction to the monitoring level she eventually faces also depends on social
identity. If the experienced level of control is lower than the expected
control level, that is, the agent faces a positive sensation, the increase in
performance is less pronounced for in-group agents than for no-group agents.
In the case of a negative sensation, however, in-group agents react stronger
than no-group agents. Put differently, being socially distant from the
principal amplies the performance-enhancing effect of a positive control
surprise and mitigates the detrimental performance effect of a negative
surprise. |