The Effects of Perceived Fairness on Opportunistic Behavior

Abstract

The classic agency model provides the basis for a large number of organizational contracts in the contemporary business environment. However, contracting provisions based on this model may induce undesirable behavior and shifts in employee value systems. Therefore, we expand upon the agency model by exploring fairness as a motivator of positive behavior in the contracting environment. Managers were asked to make a cost allocation decision in which we manipulated information asymmetry (absent or pre-sent) and incentives (absent, low, or high). Results indicate that subjects' perception of the fairness of the action dominates the agency effect in determining the intent to act opportunistically. Further analysis suggests that, among subjects who perceive that the action is unfair, the inclination to behave opportunistically is insensitive to the size of the incentive to do so. We conclude that researchers and managers should consider fairness as an important element of the opportunity-incentive-action dynamic when the need for contracting around potential agency problems arises.