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Abstract
Experimental Evidence of the Effects
of Incentive Design on the Value
of Communication
Hung-Chao Yu Tay-Chang Wang
National Chengchi University National Taiwan University Wu-Chun Chi
Chung-Yuan Christian University
Wednesday, August 15, 2001—10:15–11:45 AM
Forum Paper, Table 43—Management Accounting
This paper experimentally examines the interactions between incentive inten-sity and the value of communication be-tween owner and manager. Seven hypoth-eses based on the comparative statics predictions of a Bayesian game model are tested. The experimental results from six laboratory market settings reveal several important conclusions. First, communi-cation is valuable in mitigating manager’s dysfunctional behavior of giving up in-novation project. Second, the value of communication could be hurt by a high incentive intensity. This result may par-tially explain the empirically weaker in-centive intensity than theory prediction. Finally, a project’s outcome uncertainty
affects subjects’ perception about the connection between their actions and the corresponding payoffs. The strength of this “salience ambiguity” in turn consti-tutes a key condition under which model predictions may or may not predict sub-jects’ strategic behavior. In particular, we find that the predictive power of our model substantially improves when sub-jects’ salience ambiguity decreases due to lower outcome uncertainty. These find-ings expand the managerial accounting literature by showing how incentive-related variables (i.e., project’s outcome uncertainty and incentive intensity) may affect the effectiveness of a participative budgeting system.