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COMMENTS ON: CHOY AND KING, “INTRINSIC MOTIVATION AND EXTRINSIC INCENTIVES: AN EXPERIMENTAL INVESTIGATION OF EXOGENOUS GUIDANCE AND GATEKEEPER BEHAVIOR”

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Presentation on theme: "COMMENTS ON: CHOY AND KING, “INTRINSIC MOTIVATION AND EXTRINSIC INCENTIVES: AN EXPERIMENTAL INVESTIGATION OF EXOGENOUS GUIDANCE AND GATEKEEPER BEHAVIOR”"— Presentation transcript:

1 COMMENTS ON: CHOY AND KING, “INTRINSIC MOTIVATION AND EXTRINSIC INCENTIVES: AN EXPERIMENTAL INVESTIGATION OF EXOGENOUS GUIDANCE AND GATEKEEPER BEHAVIOR” Shyam Sunder The Eighteenth Symposium on Auditing Research University of Illinois at Urbana-Champaign October 2-4, 2008

2 WHAT DO I LIKE ABOUT THE PAPER What is the influence of financial incentives vs. social sanctions on behavior? What is the influence of participation in deciding what is acceptable? Address these questions in a context which has some parallels with the context in which auditors work (but at a highly abstract level) Abstraction simplifies the experiment, more generalizable, but also risks missing details that may turn out to be important 4/23/ Sunder: Extrinsic-Intrinsic Motivation

3 ARE THESE QUESTIONS IMPORTANT? Expanded role of regulations and written standards with formal power of enforcement behind them in accounting and auditing over the past 75 years Diminishing role of social norms (i.e., general acceptance, as in GAAP and GAAS), in favor of formal imposition under securities laws Dominant view of written standards and greater power of enforcement The questions are important to assess the wisdom of substituting social norms by formal standards Answers may help us look for a balance between the two to retain accounting as a profession 4/23/ Sunder: Extrinsic-Intrinsic Motivation

4 WHAT IS A PROFESSIONAL? A professional does well by doing right Pure professionals are rare; professionalism is a matter of degree—how much weight does one place on “right” vs. immediate personal welfare? The study of professions belonged largely to the discipline of sociology until about the mid-twentieth century Then, the economists entered the field of study of professions, treating professionals as any other economic agent in their models This switch in our perspective on professions has had major consequences—replacement of social norms by extrinsic incentives “Professionalism” not in the vocabulary, Thicker rule books under guise of guidance But search engines (Google) are free 4/23/ Sunder: Extrinsic-Intrinsic Motivation

5 STUDY OF SOCIAL NORMS Social norm is a mutual shared expectation of behavior of the members of a group in various circumstances Like natural languages, manners, and fashion, they evolve over time, are imperfectly defined, acquired by participation, and may carry subjective sanctions for deviant behavior Can have powerful influence on behavior Play important role in most aspects of life— family, neighborhood, classroom, work, law, etc. even though they are often difficult to define Great deal of room for judgment 4/23/ Sunder: Extrinsic-Intrinsic Motivation

6 STUDY OF INCENTIVES Incentives can be broadly construed to include social norms, but here they are used more narrowly to include only extrinsic, reasonably well-specified reward/punishment schemes, but not limited to monetary or material consequences Until recently, most economics concentrated on incentives Study of incentives characterizes the law and economics school of thought, and accounting is followed the suit in recent decades Increasing recognition of the role of social norms in law, but not much in accounting literature 4/23/ Sunder: Extrinsic-Intrinsic Motivation

7 IS THERE A CONFLICT BETWEEN INCENTIVES AND SOCIAL NORMS? Some times: Leave work at 5 or work till 10 PM? Grade curve used for a large class when the school does not specify a rule? Reporting falsification of books by a valued client to the partner? Accounting management of income? 4/23/ Sunder: Extrinsic-Intrinsic Motivation

8 COMMITMENT AND MOTIVATION Participative budgeting example Evolution of social norms is necessarily participative, although such a process calls for long gestations periods, and the experimental treatment is more in the spirit of participative budgeting Once people commit to something, they are willing to make sacrifices to meet that commitment to a certain degree However, there an alternative Hayeking explanation in terms of aggregation of information 4/23/ Sunder: Extrinsic-Intrinsic Motivation

9 IS THERE A CHANCE THAT THE EXPERIMENT MIGHT YIELD INTERESTING ANSWERS? Refreshing to see Choy and King bring social norms to our research discourse and ask: will people sacrifice economic advantage for social norm? Answers are potentially interesting because the predictions of the incentives theory may not hold empirically when they stand on conflict with the predictions of social norms theory The paper shows that both incentives as well as social norms matter There are situations where social norms dominate the incentives and vice versa Under what conditions is not yet clear 4/23/ Sunder: Extrinsic-Intrinsic Motivation

10 FINDINGS 1 AND 2 In social settings, participation in developing the norm induces more conformity to the norm even if it means personal sacrifice associated with disrupting misconduct by others Nice result, but these two conclusions listed at the end of the paper seem one and the same as I understand them. Perhaps they need to be distinguished better 4/23/ Sunder: Extrinsic-Intrinsic Motivation

11 FINDING 3 Extrinsic incentives crowd out the gatekeepers’ intrinsic motivations in developing social norms The generalizability of this conclusion is qualified by the magnitude of the extrinsic incentive of 50 points. I suspect that a smaller incentive may yield a different result The import of this finding could be emphasized better: the effect of increasing the enforcement power and incentives on degrading the norms that evolve in society In other words, increasing the power of enforcement is not for free. See the history of enforcement power in accounting (CAP, APB, FASB) and auditing (ASB, PCAOB etc. Enforcement affects norms and expectations, and not necessarily in a desirable direction These conflicts not adequately considered in accounting literature We could do better by considering these feedback loops 4/23/ Sunder: Extrinsic-Intrinsic Motivation

12 FINDING 4 When gatekeepers face financial punishment, proposers behave better (for the fear of being rejected Feedback anticipatory effect of proposers Financial incentives affect participatory standards However, this conclusion should not leave the impression that the prospect of rejection due to social norms will not have a similar effect (if social sanctions were allowed to vary in the experiment) Are these results unexpected? No Are they interesting? Yes, because they point towards a direction which has been largely ignored in accounting and auditing policy formulation during the recent decades 4/23/ Sunder: Extrinsic-Intrinsic Motivation

13 SUGGESTIONS There is no contradiction between these two cases (as claimed on page 3): Fewer detections because the auditor drops high risk clients (Bockus and Gigler, 1998) Higher audit quality (more detections) under of increased auditor liability (Geiger and Raghunanadan, 2002) The first case concerns the decision to accept an engagement while the second case concerns how the audit is conducted conditional on engagement If the Williamson (2008) result (expanding the scope of employee decision making increases firm value) were true in general (p. 4), there would be no gains from specialization in management, an unlikely result 4/23/ Sunder: Extrinsic-Intrinsic Motivation

14 SUGGESTIONS Although you have designed the gatekeeper ultimatum game, you do not make this contribution clear to the reader in the paper. This game could be of much broader interest It would be nice to present the formal structure of the game and provide its equilibrium The financial penalty on gatekeeper is substantial, and the inference of dominance is a function of its magnitude, and should be appropriately qualified. Why so large? I am not sure I understand the crowding-in vs. crowding-out argument 4/23/ Sunder: Extrinsic-Intrinsic Motivation

15 MINOR ISSUES Repetition (tighten the write up) What is weighted average majority rule? Very little in Figure 3 which is not in Figure 2 (just add the cumulative line to Figure 2) 4/23/ Sunder: Extrinsic-Intrinsic Motivation

16 INNOVATION Important, interesting, and innovative paper Given the complex institutional structure of accounting, it is difficult to conduct laboratory experiments whose findings might have a credible chance of being generalized outside The paper introduces, designs, conducts, analyzes a new game (gatekeeper ultimatum game that I have not seen before). Use of a remote charity as the passive receiver. The game captures some important aspects of auditing and helps gain insights into a phenomenon of great interest This goal is accomplished with a remarkably simple design with minimal complexity It is my hope that becomes an example of an innovation from accounting literature that is carried to economics 4/23/ Sunder: Extrinsic-Intrinsic Motivation

17 THANK YOU! 4/23/ Sunder: Extrinsic-Intrinsic Motivation


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