Experimental effects of institutionalizing co-determination by a procedurally fair bidding rule

Federica Alberti, Werner Guth, Kei Tsutsui*

*Corresponding author for this work

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    Abstract

    From an institutional perspective we contribute to corporate governance of firms by 1) proposing a procedurally fair mechanism that is ethically desirable, and 2) experimentally testing whether procedural fairness crowds-in ethical behavior of managers (on behalf of share-holders) and workers. The experimental setup sees one ‘manager’ and three ‘workers’ (possibly representing three sections of the firm) co-determining an efficiency-enhancing investment which could harm some workers. Firstly, the manager claims a share of the investment surplus, then workers ‘bid’ for the investment to express their willingness to satisfy the manager’s claim in case the investment is implemented. If the sum of workers’ bids is less than the manager’s claim, the investment is not implementable, which means its surplus will be lost. Workers’ behavior is ‘ethical’ when they veto unfair managerial claims, because the workers have to sacrifice own earnings. Hence, workers can ‘enforce’ their ethics on the manager by threatening veto. If the manager claims fairly, workers’ ethical behavior is to ‘truthfully’ bid their investment evaluations; by all doing so, they equally share whatever surplus the manager has left for them. The experimental results show ethical behavior of managers in the form of fair claims. Despite these fair claims, workers behave less ethically by strategically underbidding. So the procedurally fair mechanism only partially crowds-in ethical behavior. This study should interest theorists of stakeholder management, especially those engaged in designing the rules of corporate governance.
    Original languageEnglish
    Number of pages14
    JournalJournal of Business Ethics
    Early online date18 May 2022
    DOIs
    Publication statusEarly online - 18 May 2022

    Keywords

    • ethical institutions
    • ethical behavior
    • fair surplus sharing
    • co-determination
    • procedural fairness
    • laboratory experiments

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