THE EFFECTS OF PAY RAISE FREQUENCY WITHIN GROUPS ON COLLUSION

Abstract

This study examines how the frequency of performance-based pay raise opportunities affects collusion within groups. I predict that expectations of future reciprocity between group members will increase the likelihood of collusion during raise periods compared to non-raise periods, even in a setting subject to deterrent controls (e.g., mutual monitoring). Furthermore, the frequency of these raise periods determines which of two theoretical reporting norms develops. I find that groups with relatively infrequent pay raises oscillate between collusion during raise periods and truthful reporting during non-raise periods, consistent with moral licensing theory. Conversely, when pay raise frequency is high, I document a bleed-over effect whereby collusion spreads into the non-raise periods, consistent with ethical erosion. Specifically, while fewer participants in the high (vs. low) frequency conditions colluded during raise periods, those that did tended to collude throughout.