Why Don’t People Lie? Negative Affect Intensity and Preferences for Honesty in Budgetary Reporting

Abstract

Budgets are instrumental in management control systems but are prone to gaming behavior that creates slack and limits the effectiveness of budgets. Research suggests, however, that subordinates have preferences for adhering to a social norm of honesty that limits slack in their budgetary reporting. As such, an increased understanding of subordinates’ preferences for honesty can improve participative budgeting systems. We develop and test theory that increases our understanding of the drivers of preferences for honesty. We test the theory that preferences for honesty originate from an individual’s desire to avoid negative affect from violating social norms. Further, individuals systematically differ in the intensity with which they experience their negative affective reactions. Those with higher levels of this intensity (negative affect intensity, NAI), experience more negative affect and disutility from violating a norm of honesty. Thus, NAI is predictive of subordinates’ preference for honesty. Experimental results support our theory. Budgetary slack is constrained by preferences for honesty and NAI increases preferences for honesty. As such, preferences for honesty are a stronger informal control for subordinates with higher NAI. We discuss the implications of our theory for contract design and job assignment.