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The Effect of Control Systems on Trust and Cooperation in Collaborative Environments

Author(s): Angela L. Coletti, Karen L. Sedatole and Kristy L. TowryReviewed work(s):Source: The Accounting Review, Vol. 80, No. 2 (Apr., 2005), pp. 477-500Published by: American Accounting AssociationStable URL: http://www.jstor.org/stable/4093066.

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THEACCOUNTING EVIEWVol. 80, No. 22005pp. 477-500

h e f f e c t o f o n t r o l S y s t e m so n T r u s t a n d ooperation nollaborative Environments

Angela L. ColettiThe Universityof Texasat AustinKaren L. SedatoleThe Universityof Texasat Austin

KristyL. TowryEmory UniversityABSTRACT: ecause of conflicting ncentivesamong participants, ollaborationse.g.,strategic alliances,jointventures,and workteams) present a significantcontrolchal-lenge to managerial ccountants.On the one hand,formalcontrolssuch as sanctioningand monitoring ystems improvecooperation by reducing he incentivesforopportun-istic behavior.On the other hand, priorresearchfinds that the mere presence of acontrol system causes decision makers to view the collaborativesetting as non-cooperative, and other collaboratorsas untrustworthy.nthis paper,we conduct twoexperiments in which participantsact as business collaborators.Through hese ex-periments,we examine the effects of control on trustand cooperationin collaborativesettings. Specifically,we posit and provideevidence that a strongcontrolsystem canenhance the level of trustamong collaborators.The mediatingroleof control-inducedcooperationprovidesthe mechanism by which controlsystems can increasetrust incollaborativeenvironments.Furthermore, e show that this increasedtrusthas a pos-itiveeffect on the subsequent levelof cooperationamongcollaborators.Takenogether,the results suggest an increasingmarginalbenefit of controlsystem strengtharisingfromthe trust thatcontrol-induced ooperationengenders.Theimplications thatfirmswillchoose to implementa strongercontrolsystem thanpreviousresearchwouldseemto suggest.

This paperhasbenefited rom usefuldiscussionswith ShannonAnderson,UrtonAnderson,HarryEvans,R. LynnHannan,VickyHoffman,BruceJohnson,Steve Kachelmeier,WilliamKinney,LisaKoonce,MarlysLipe(editor),Molly Mercer,Don Moser,Bill Rankin,Casey Rowe, SteveSalterio,JanetSamuels,RickTubbs,Wim VanderStede, two anonymousreviewers,workshopparticipants t Arizona State University,The Universityof Iowa,University f Pittsburgh,ndThe University f Texasat Austin,andparticipantst the AAA MAS 2004 MidyearMeetingand the 2004 SoutheastSummerAccountingResearchColloquium.We gratefullyacknowledgePriteshGhaghadaor his programmingupport, nd RomanaAutrey,KirillNovoselov,andJessenHobson or theirhelpin administeringheexperiments.Weappreciatehe financial upport f the McCombsSchoolof BusinessCenterfor BusinessMeasurement ndAssuranceServices,andthe EugeneandDoraBonhamMemorialFund.Editor'snote: Thispaperwas acceptedby MarlysGaschoLipe,Editor. Submitted August 2003

Accepted July 2004477

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478 Coletti,Sedatole,and TowryKeywords: collaboration;trategicalliance; oint venture; eams;controlsystem;Attri-butionTheory; raming; rust;cooperation.

I. INTRODUCTIONO v e r thepastseveraldecades, ollaborativenterpriseasemerged s an importantbusiness trend.Popular orms of collaboration ncludeteams,throughwhichcom-paniesseekgains from the synergyof employeesworking ogether owardcommongoals, as well as strategicalliances,joint ventures,and industryconsortia,throughwhichcompaniesreachoutside theirboundaries o gain a competitiveadvantage.This new col-laborativeenvironmentpresentsa managerial ontrolchallengeto firms as they attempt oidentify optimallevels of control mechanismswhile simultaneously onsidering he impactof such mechanismson interpersonalrust. Prior researchfinds that trust is a primarydeterminant f collaboration uccess (e.g., Spekmanet al. 2001; Zaheeret al. 1998;ZaheerandVenkatraman995). However,some scholarssuggestthat controlsystemsreducetrustamongcollaborators. everal theorieshave been used to makethis argument.Forexample,some scholarsarguethatthe merepresenceof a controlsystem changesthe way decisionmakersmentallyframe the situation,causingthem to perceiveother collaborators s lesstrustworthye.g., Tenbrunseland Messick 1999). Otherssuggest thatcooperation n thepresenceof a controlsystem is attributed o the constraintsmposedby the controlsystemratherthan the cooperator's nherenttrustworthiness,hus inhibitingthe developmentoftrust(e.g., Malhotraand Murnighan 002).In this paperwe challengethe view that controlsystems reducetrust. We arguethatpriorstudiesdocumenting he negativeeffects of controlsystems are limited becausetheyfail to incorporatewo common featuresof controlsystems.First,priorstudiesdo not allowfor the increasedcooperation hat is likely to arise fromthe economicincentivesinherentin controlsystems.Forexample,Malhotra ndMurnighan2002) compare he level of trustthat develops when control systems are presentversus absent.In that study, participantsbelieved they were interactingwith other participants ia a computernetwork.However,these other participantswere actually computerspre-programmedo always cooperate.Thus,MalhotraandMurnighan2002) hold the level of collaborative ooperation onstantacross conditions.Second,priorstudies do not allow for feedbackregardingevels of co-operation e.g., performance eports).Tenbrunsel nd Messick(1999), for example,simplydo not provideparticipantswith feedback on the level of collaborativecooperation.Ourstudy,however,allows for control-inducedooperativebehavior hatis observedby partic-ipants.Specifically,we posit and provideevidencethata controlsystemcan actuallyen-hancethe level of trustamongcollaborators, rovided he controlsystem is strongenoughto inducecooperationand thatthis cooperation s observedby the collaborators.Further,we show thatthis increasedtrust has a positiveeffect on the futurelevel of cooperationamongcollaborators.Takentogether, he resultssuggestan increasingmarginalbenefitofcontrolsystem strengtharisingfrom the trust thatcontrol-inducedooperationengenders.The implication is that firms will choose to implement a stronger control system thanprevious research would suggest.This study is important to managers who form collaborations and to managers, man-agerial accountants, and internal auditors charged with establishing managerial control sys-tems. While firms have eagerly embraced collaboration as a key strategy, many types ofcollaborations are notoriously unstable, with a number of experts attributing their highfailure rate to a lack of trust. This study suggests that one approach to increasing trust isto strengthen the control systems used to govern collaborative agreements, both in termsof their incentives and their feedback. That is, through increased monitoring, sanctioning,TheAccountingReview,April2005

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TheEffectof ControlSystemson Trustand Cooperation 479and rewarding, irms can inducehigherlevels of cooperation.The control-induced oop-eration,when observedby collaboratorsvia feedbackmechanismssuch as performancereports,will engendertrust,therebyreinforcing he positiveeffects of the control mecha-nisms. Thus, this paperanswers recent calls for researchto provide insightsregardingwhetherexplicit contractsbased on managerialaccountinginformation oster or destroyreciprocityandcooperation Sprinkle2003, 296).We conducttwo experimentso explorethe effects of controlon trustandcooperation.The firstexperiment s conductedusing the traditionalapproachof psychology-basedex-perimentalwork, whereasthe second uses an approachmorerepresentativef the experi-mentaleconomics literature.We exploit the advantagesof each methodin order to tri-angulate the results and develop a more comprehensiveunderstanding f the complexrelationsamongcontrol,trust,andcooperation.Thus,this studyillustrates he potential orresearchthat combineseconomics and psychology-based heory to provideinsights intoaccountingissues (Haynes and Kachelmeier1998; Merchantet al. 2003; Moser 1998;Waller1995, 2001).In bothexperiments,participants ssume the role of a manager nvolved in a collabo-ration. In Experiment1, we manipulate he presenceor absenceof a controlsystem andrandomlyassign participants uch that inherenttrustworthinesss not expected to differacrossconditions.We findthatparticipants ooperatemorein the controlsystemcondition,suggesting hat thecontrolsystemmanipulation rovides ncentivesstrongenoughto inducecooperation. mportantly, second set of observerparticipantsatetheparticipantsssignedto the controlsystemcondition as moretrustworthyhan those assignedto the no controlsystemcondition.Since the inherent rustworthinesss not expectedto differ acrosscon-ditions, it appearsthatthe observerparticipants ttribute he control-induced ooperationto the inherentrustworthinessf the managers.Thus,we find thatthe presenceof a controlsystemenhances the level of trust n a collaborative etting,andthatobservedcooperationperfectlymediatesthis effect.We corroborateand extend these findings in the second experiment,which, unlikeExperiment1,allows us to investigatehe effect of truston subsequent ooperativebehavior.We again manipulate he presenceor absence of a control system, randomlyassigningparticipants uch thatinherent rustworthinesss not expectedto differ acrossconditions.Participantsn this experimentmake decisions underexplicit incentives and salientcashpayments.Over 20 periodsof play, we again find that cooperation s greaterfor thoseparticipants peratingunder a controlsystem than for those operatingwithout one. After20 periods,we removethe controlsystem, suchthat,although he conditionsvaryin termsof the interactivehistories, the incentivesgoing forward are equivalentacross the twoexperimental onditions. We findthattrustis greater or those participantswho had beenoperatingundera control system than for those who had not. We again documentthatobservedcooperationperfectlymediates the effect of the controlsystemon trust.Further,we findthatparticipants reviouslyoperatingundera controlsystem continue to be morecooperative than those previously operating without one.The remainder of the paper is organized as follows: In Section II, we review the relevantliterature and develop the hypotheses. In Section III, we describe the experimental meth-odology and results for each experiment. Section IV concludes and discusses the implica-tions of the study.

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480 Coletti,Sedatole,and TowryII. BACKGROUNDAND HYPOTHESISDEVELOPMENTThe Growing Use of CollaborationsWe define a collaborationas two (or more) partiesinvolved in some type of jointproduction, uch thateach party's ndividualoutputcannot be directlyobserved. Ourdef-initionappliesgenerally o manydifferent ypesof collaborationshatarebeingincreasinglyused to establishcompetitiveadvantage.Forexample, n a surveyof 700 Americanworkersby Dale Carnegie Training,90 percentof the respondentsreportedspendingsome timeworkingin teams (Allerton 1996). Firms also increasinglyengage in alliances with otherfirms (e.g., licensing agreements, oint ventures,industryconsortia,and strategicsupplychains).(See Andersonand Sedatole[2003] and Birnberg 1998] for a discussion of col-laboration ypes and their inherentcontrol problems.)Accordingto a recent survey,theaveragefirmin a groupof 90 multinationalsormed117 alliancesover a three-yearperiod(Gordonet al. 2000). In fact, manynow view relationalcapital-the ability to attractandinteracteffectivelywith alliancepartners-as a core competency(Schifrin2001).

Risk and Control in CollaborationsWhile collaborationsundoubtedlyprovidemanyadvantages, hey are also quiteunsta-ble (Church1996; Das and Teng 2000; Dumaine 1994; Parkhe1993). Collaborations revulnerable o failurebecausethey areexposedto both performanceisk and relationalrisk (e.g., Das andTeng 1996, 1999, 2001). Performance isk is the probability hat col-laboration bjectiveswill not be achieveddespitethe full cooperationof the partners.Thistype of riskcomes primarily rom market orces such as competitionand demandfluctu-ations and is, therefore,not uniqueto collaborations.Relationalrisk,on the otherhand,isthe probability hat collaborationobjectives will not be achieved because of a lack ofcooperation.This risk is uniqueto collaborationsandis, therefore, he focus in this paper.High levels of relationalriskarise becauseof the social dilemmanatureof collabora-tions. Social dilemmasaresituationswhereopportunistic ehavior eadsto suboptimalout-comes but cooperativebehavior s not individuallyrational Dawes 1980). Collaborationsare formedbecause of the belief that there are gains from cooperationand informationsharing.However, he difficultyof measuring ndividualcontributionso collaborativeout-putcreatesan incentivefor opportunistic ehavior,as collaborators retempted o free-rideand withhold information.Further, f all collaboratorsbehave in this manner,then thecollaboration tself is destinedto fail.Managementaccountants can play an importantrole in mitigating relationalriskthrough he design and implementation f formal controlmechanisms,such as systems of

monitoring,sanctioning,and rewarding Seal et al. 1999).Control,broadlydefined,com-prisesthe variouspolicies and procedureshat firms use to mitigatedifferent ypesof risk.Controlsmitigaterelational iskby changingthe incentives oropportunistic ehavior.Thatis, periodicmonitoringncreases heprobabilityhatopportunistic ehaviorwill be detected,and sanctioning rewarding) ystems impose penalties(bonuses)on collaboratorswho (donot) engage in suchbehavior.Priorempiricalresearchdocuments he use of formalcontrolmechanismsto reduce relationalrisk in collaborations. ttneret al. (1999), for example,documentbenefitsof increasedselection andmonitoringpractices e.g., frequentmeetingsandsuppliercertificationprograms) or supplierpartnershipssee also, Grootand Merchant2000; Clement 1997). Others have documented he benefitsof performancemeasurement(e.g., Meyer 1994) and surveillance e.g., Sewell 1998) in collaborative ettings.


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TheEffectof ControlSystemson Trustand Cooperation 481Froma theoreticalperspective,agency theory providesinsightsinto the optimallevelof controlfor mitigatingrelational isk in collaborative ettings.'Using a similarapproach,Figure1, PanelA illustrates he fundamental rade-offbetweenthe cost of control and thecosts incurredwhencollaborators ehaveopportunistically.pecifically,we assumethatthe

expectedcost of opportunistic ehavior i.e., relationalrisk)decreaseswith controlsystemstrength.Offsettingthis benefit is the cost of implementingand maintaining he controlsystem, which increases with controlsystem strength.As the figureillustrates, here is animplied optimal level of control for which total costs are minimized.2 mportantly,hisoptimalcontrollevel likely resultsin something ess thanfull cooperation. n otherwords,the firmmustassume some relationalriskbecausecompletecontracts i.e., providing ullcooperation)areprohibitively xpensive,largelydueto theperformance mbiguitynherentin collaborations.As implied by Figure 1, Panel A, in choosing the level of control,it is important orfirmsto understandhe relationbetween the strengthof the controlsystem and total cost.Below,we explorehow this relationchangeswhen trustis addedto theequation Chenhalland Langfield-Smith2003; Spekman et al. 2001; Zaheer et al. 1998; Zaheer andVenkatraman 995).Control and TrustWe define trustworthiness s an innatepersonalcharacteristiceflectingone's prefer-ence for upholdingsome social norm of behavior,regardlessof economic incentives.3 ncontrast,we considertrust to be one's perceptionof another'strustworthiness.Becausecollaborationsare formedspecificallyto capturegains from synergy,it is reasonabletoassume thatcooperation s viewed as a relevantsocial normin these settings.Thus, trustis conceptualizedas the perceived ikelihoodthat anotherpersonwill cooperate,absentanyeconomic incentivesto do so (i.e., I trustyou to do the rightthing, becauseyou are atrustworthy erson ).It is importanto note thatourdefinitiondiffersfrom a game-theoryperspective(e.g., Williamson1993), which assumes that trust occurs when the economicincentivesfavorcooperativebehavior i.e., I trustyou to do the rightthing,becauseit isnot in your best interestto do the wrong thing ). Throughouthis paper,the termtrust-worthinessrefersto an innatepersonalcharacteristic,while trustrefers to an individual'sperceptionof another's rustworthiness.4Priorresearchsuggests that control systems can have unintendednegativeeffects ontrust,a findingof particular oncernbecause of trust'scritical role as a determinantofcollaborative uccess (Das andTeng 1998;Jarvenpaa t al. 1998;Kale et al. 2000; Kramerand Tyler 1996; Landry1998; McAllister1995; Spagnolo 1999). If this claim is correct,then this presentsa conundrumo the designersof managerial ontrolsystems,who mustchoose the optimallevel of control,consideringboththe benefits(throughreduced ncen-tives for opportunistic ehavior)and the costs (includinga degradation f trust).

Specifically, his research howsthat firmsmaymakecost-savingreductionsn explicitincentives i.e., weakenthe controlsystem) in contractingwith employeesbecause of the supporting mplicit incentives(e.g., peerpressure,mutualmonitoring) rovidedby teammembers Aryaet al. 1997;BarronandGjerde1997;Che andYoo2001). Balakrishnant al. (1998) further how a trade-offbetween he cost and benefits teamperformanceimprovements)n choosingthe strength f the controlsystem(i.e., the informativeness f an audit).2 We do notclaimto haveoperationalizednoptimal ontrol ystem,because o do so wouldrequire specificationof controlsystemcost, which is outsidethe scope of this study.Rather,we examinehow incorporatingrustinto the modelshiftstheoptimal evel of control.SRelevant ocial normsmayincludehonesty, airness,cooperation, ommitment, eciprocity, ccountability,tc.4 See Kramer1999) forotherconceptionsof trust n an organizationaletting.


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482 Coletti, Sedatole, and Towry

FIGURE 1Control Costs, Relational Risk, and the Optimal Level of ControlPanel A: Fundamental Trade-Offbetween Control Costs and Relational Risk

CostsTotal

o s t s

RelationalRisk Cost of(ExpectedCostControlof Opportunistic System

Behavior)

ControlSystemOptimalLevel Strengthof ControlPanel B: The Effect of Trust on the Optimal Level of Control

CostsTotalCosts

- - . , , ,o s t o fRelational isk C o n t r o l(ExpectedCost Systemof Opportunistic SystemBehavior) I .

,f Control SystemSOptimal Level Strengthof ControlAdaptedromJuran1974).

Two main bodies of theoryhave been proposedto explain why control systems mayreducetrustandcooperationn collaborative ettings.The firstbody of theoryis relatedtoframing. Accordingto this theory,decision makingin social situationsbegins with a cat-egorization process. That is, the decision makerasks, Whatkind of situationis this?(Marchand Heath 1994, 58). The answerto this questiondependson environmental ues.TheAccountingReview,April2005

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TheEffectof ControlSystemson Trustand Cooperation 483The resultingcategorization,or decisionframe, has a powerfulinfluenceon the decisionmaker,affectingnot only the perceptionsof what norms are applicable,but also the ex-pectationsof others(Messick 1999).Firmsformcollaborations pecificallyto capturegains from synergyandcooperation.Therefore, he collaborative ettingitself serves as an environmental ue, and in the basecase, decisionmakersare likely to framethe situationas inherently ooperative,andothercollaborators s inherently rustworthy.Tenbrunsel nd Messick (1999) suggest, however,that the introductionof a control system may serve as anothercue, affecting how thesituation s categorized.Specifically,they examine social dilemmasin a collaborative et-ting, and find that a control system invokes a business (as opposed to ethical) frame.Consequently,with a controlsystem,collaborators ocuson a logicaland rational valuationof thecosts andbenefitsof cooperation, atherhanon social normsof behavior.Thisframeincreasesthe salienceof prospectsfor opportunisticbehaviorby both the decision makerandothers.In fact,Tenbrunsel ndMessick (1999) provideevidence that bothcooperationand trust(i.e., expectationsof cooperation)are lower undera weak control system thanunderno controlsystem.5They conclude thatcontrolsystems may have a negativeinflu-ence on perceptions,perhapspromotinga distrustof coworkers Tenbrunsel ndMessick1999, 693).Second,AttributionTheory(Birnberget al. 1977;Jones 1990; Kelley 1967) has beenused to examine the effects of control systems on perceivedtrustworthinessnd trustingbehavior(e.g., Kruglanski1970; Malhotraand Murnighan2002; Strickland1958). Attri-butionTheory comprises a wide body of literatureaimed at understanding ow peoplemakecausalattributionsegarding, orexample,thebehaviorof others.Generally peaking,behaviorscan be attributed o either dispositionalor situationalfactors. In the presentcontext,when a collaborator ooperates,other collaboratorsmay attributehe cooperationeither to the person'sinnatetrustworthinessa dispositionalcharacteristic) r to the factthatthereis a controlsystem in place (a situational haracteristic). orexample,MalhotraandMurnighan2002) find thatcooperationn thepresenceof a controlsystem(i.e., bindingcontract) s attributed t least partially o the constraints mposed by the control system.On theotherhand,cooperationn the absenceof a controlsystem(i.e., nonbinding ontract)is perceived o be a reflectionof a person'strustworthiness.Malhotra ndMurnighan2002)concludethatcontrolsystems inhibitthe developmentof trust.Limitations of Prior ResearchPriorstudies fail to incorporatewo common featuresof controlsystems:(1) increasedcooperationnducedby the economicincentivescontrolsystemsprovide,and(2) feedbackregarding hat cooperation(e.g., performancereports).Because of these two exclusions,priorstudies inhibit the positive effects of controlsystems. Some studies hold the levelof collaborativecooperation constant. For example, participants n the MalhotraandMurnighan 2002) studybelievedthey were interactingwithotherparticipants ia a com-puter network. However, these other participants were actually computers pre-programmedto always cooperate. Thus, this study compares how trustdevelops when individuals observeothers cooperating in the presence versus absence of a control system. In contrast, our studyrecognizes that effective control systems provide economic incentives for cooperation, and

Researchers ave madesimilarclaims n othercontextsrelated o the moregeneral deathatextrinsicmotivationreduces ntrinsicmotivation including rust)(B~nabouand Tirole2003; Bohnetet al. 2001; FreyandJegen2001;Pfeffer1998a,1998b),a concept ormalized n economicsas MotivationCrowdingTheory Frey1997).Forexample,Yamagishi 1998) argues hatJapanese ubjectsare less trusting han American ubjectsbecausecontract nforcementmechanisms remoreprevalentn Japan.TheAccountingReview,April2005

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so the level of cooperation s likely to be higherwhen a controlsystemis in place. Thus,our studyincorporateshe mediatingrole of control-inducedooperation.Further, ome studies (e.g., Tenbrunseland Messick 1999) overlook feedback (e.g.,performance eports),a commoncomponentof formalcontrolsystems aimed at reducingrelationalrisk. This limitation s significant,becausefeedbackcan potentiallymitigatethenegativeframingeffects describedabove.In the multiperiod ollaborative etting,feedbackregardingpartner ctionsbecomesan additional nvironmentalue thataffects how collab-oratorsevaluate their partnersand how they frame the situation n subsequentdecision-makingperiods.Specifically,in viewing theirpartners' ontrol-induced ooperation,col-laboratorsmay favorablyupdate heir beliefs aboutpartnerrustworthiness.Kramer 1999)notes thatperceptionsof trustworthinessre largelybasedon such interactivehistories.In summary,priorstudies inhibit the positiveeffects of controlby ignoringthe possi-bility thatobservedcontrol-induced ooperationcan build trust.In contrast o priorwork,we predictand show thata strongcontrolsystem increasescooperation.Further,we allowcollaborators o observe this increasedcooperation i.e., cooperation eedback).Weexpectthis observationof control-induced ooperationto lead to increasedtrust because of adocumented endencyof observers o overattribute thers'behaviors o dispositionalchar-acteristics(Gilbertand Malone 1995; Jones and Harris 1967). This result is so widelyobservedthatit is known as the FundamentalAttributionError Ross 1977).In thecurrent tudy'scontext,when collaboratorsooperate n the presenceof a controlsystem, observers (i.e., other collaborators)are likely to at least partiallyattribute hiscontrol-inducedooperationo thecollaborators'nherent rustworthiness.hus,thecontrolsystem will have a positive effect on the level of trustamong collaborators.mportantly,althoughcollaboratorsare unlikelyto ignoresituational actors,the tendencyto attributecooperativebehavior o dispositional actorswill lead to a strong udgmentof trustworthi-ness (a disposition).Observedcontrol-induced ooperationprovidesa basis for the formationof trustbe-tween collaborators.This effect is illustratedn Figure1, Panel B, in two ways. First,therevisedrelationalrisk curve lies primarilybelow the originalcurve.That is, because theexplicit controls are augmentedby trust, the probabilityof opportunisticbehavior,andhence, the cost associated with relationalrisk, decreases for a given level of control.6Second, the revised curve is steeperthan the originalcurve.This reflectsthe notion thatthe level of cooperation s expectedto increasewith controlstrength,and so the positiveeffects of trust should also increasewith controlstrength.7 n other words, the marginalbenefitof control ncreasesbecauseof the trust hatcontrol-inducedooperation ngenders.8Thereis a correspondinghift in the total cost curve thatresultsin a higher optimal(i.e.,minimum otalcost) level of control.The implication s thatfirmswill choose to implementa strongercontrolsystem thanpreviousresearchwould seem to suggest. The process bywhich we predictcontrol to positively affect trust and cooperation s pictured n Figure2and summarizedby the hypothesesbelow.

6 This is in contrast to the prevailing view of the effect of control on trust, which would suggest that the revisedcurve lies above the original curve.7 At extreme levels of control system strength, it is theoretically conceivable that the revised curve would not besteeper than the original curve (i.e., the effect of trust on cooperation might not be increasing in the level ofcontrol). However, this condition is likely outside the norm of operations for most firms.SWe show the revised curve crossing above the original curve at extremely low levels of control to allow for thepossibilities (if the control system is sufficiently weak) that (1 feedback might reduce trust (because of observednoncooperation), or that (2) the negative framing effects described earlier might outweigh the positive effectswe propose.

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TheEffectof ControlSystemson Trustand Cooperation 485

HypothesesAs describedabove,we expectthe level of trustto increase n controlsystem strength.Priorstudieshave generallyviewed controlas a dichotomousvariable(controlversusnocontrol).Thus, in developingand testing the hypotheses,we chose two points along thecontrolstrengthcontinuum-no controlsystem versusa strongcontrolsystem. Weexpectand provideevidence for the necessaryconditionthat the control system will lead to in-creasedlevels of cooperation relativeto no controlsystem).We furtherassume thatthiscontrolinduced cooperationwill be observed by collaborators,providinga mechanismwherebyattributions or control-inducedbehaviorcan develop.Hypothesesla and lb ad-dress the fundamental esearchquestionof whethercontrolsystems create or destroytrustin collaborative ettings.Our theory suggests that when collaboratorsobserveothersco-operating,they will at least partiallyattribute his behaviorto the others' inherenttrust-worthiness.Thus,while two participantsmay be equallytrustworthy,he morecooperativepersonwill be judgedas moretrustworthy, espitethe fact that the cooperationmay havebeen inducedby the controlsystem.This resultsin the following hypothesis.

Hla: Participantswill judge others to be more trustworthywhen there is a controlsystem in place (thatinducescooperation) hanwhen thereis no controlsystem.The mechanismby which this effect occurs is the increased,albeit control-induced,cooperationof participantswhose trustworthinesss beingassessed.Thatis, we predict hata strongcontrolsystem will positivelyaffect perceivedtrustworthiness reciselybecauseof the control-inducedooperation.Thus,the prediction hat controlsystems increasetrustdependscriticallyon therole of observedcooperationas a mediatingvariable.Accordingly,we make the following prediction:Hlb: The effect of a controlsystem on perceivedtrustworthinesswill be mediatedbycooperation.The trustthatdevelopsfromobservingcontrol-inducedooperations self-reinforcingin that,consistentwith theprior iterature,we expecttrust o lead to subsequent ooperation.There is a large body of literature n managementand psychology claiming that trustpromotescooperationand is, in fact, an alternate ontrol mechanism BradachandEccles1989; Das and Teng 1998). Most of these studies claim that trustinganother ndividualpromotesmore cooperativebehaviorfrom the trustedindividual.In this study,we argue

further hattrustpromotescooperativebehaviorfrom the trustingindividual.Specifically,preferences or fairness,equity,andreciprocityareexpectedto discourageone fromtakingadvantageof a trustedcollaborationpartner Fehrand Falk 2002). Similarly,anticipatedfeelings of guilt are believed to dissuade one from behavingopportunistically gainst atrustedcollaborationpartner.H2: The level of cooperationwill be greater or collaboratorswith higherperceptionsof each other'strustworthiness.Whenviewed together, hese hypothesespresenta self-reinforcing ffect of control oncooperation.That is, the marginalbenefit of control increases because of the trustthatcontrol-induced ooperationengenders.This self-reinforcingcontrolprocess providesthebasis for our fundamental laim that,contrary o priorresearchfindings,controlsystemscan increasetrust andcooperation n collaborative ettings.


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486 Coletti,Sedatole,and TowryIII. EXPERIMENTSWe conductedtwo experiments. n both experimentswe manipulated he presenceorabsenceof a controlsystem. ExperimentI was conducted n the traditionof psychology-based experimentalwork, and allowed us to test Hla and Hlb, related to the effect of

control on cooperationand the effect of cooperationon trust.Experiment2, which tookthe approachof experimental conomics,allowed us to verifythese effects and to test H2,relatedto the effect of trust on subsequentcooperation.Each experimentinvolved theinteractionof two individuals in a collaborativearrangement.The two experimentsaredescribed n detailbelow,andour operationalmodel is pictured n Figure2.Experiment 1MethodA total of 82 undergraduatesophomoreandjuniorstatus)studentswere recruited orExperiment1 from an introductorymanagement ccountingcourseat a largestateuniver-sity. Participantseceived$10 for theirparticipationn this experiment,which involved atwo-waybetween-subjects esign.The independentactor s the controlsystem(presentorabsent).Further, ach observation omprisestwo participants,who fulfill the roles of col-laborator ndobserver.The sessionswere conducted n sequenceon the sameday withtheobserversessionsfollowingthecollaboratoressions.Eachsession lastedapproximately 0minutes.Participants' oles arediscussedbelow in turn.Participantsn the role of collaboratorread a scenario, n which they were instructedto assume therole of a researchanddevelopmentR&D)managerata largepharmaceuticalcompany.As such, the participants adto decide whether o devotemost of the division'slimited resources to its individualprojectsor to a project being conducted ointly withanotherR&Ddivision. The scenariospecifiedthattop management referredhat resourcesbe dedicated o thejointproject,and that theparticipant adpreviouslycommitted o devotea high level of resources o thejoint project.The scenariopresenteda dilemma,however,in that if the joint projectfailed, it would be difficultfor top management o determinewhich division was to blame, whereasif the individualprojectsfailed due to lack of re-sources,the participantswould be held personallyresponsible.While the scenariodid notdescribean economic game with great specificity,the scenario left little doubt that theprincipled ourse of actionwouldbe to dedicateone's resources o thejoint projectbecauseof the previouscommitment.Further,nvestment n the joint projectwas cooperative, nthat thejoint projectdrew on the expertiseof bothdivisions andwas beneficialto the firmas a whole (andby simpleextension,to the otherR&Dmanager).Thus,social normswoulddictate nvesting n thejoint project,anda trustworthyndividualwoulduphold hesenorms.However,the participantshad to weigh these norms against the cost of failing on theindividualprojects.Thoseparticipantsn thecontrolsystemconditionwere also instructedhata consultanthad been hired to makeperiodic,unannounced isits. If the consultantdetermined hat adivision hadcommittedan insufficient evel of resources o thejoint project,top manage-mentwould likely penalizethat division in the form of reducedbudgets n the future,or alower bonus to the division manager.Participantsn the no controlsystemconditiondidnot face the potentialof consultantvisits.In additionto choosing to dedicatehigh resources o individualorjoint projects,eachparticipantn the role of collaboratorwrote an essay that describedhis/her thoughtproc-esses andreasoningbehind heresourceallocationdecision.Theparticipantsn theobserverrole thenreviewedthesecollaborator esponses o assess the collaborators' rustworthiness.Importantly,ollaboratorswere randomlyassignedto controlsystemconditions,such thatTheAccountingReview,April2005

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TheEffect of ControlSystemson Trustand Cooperation 487

FIGURE2The Effectof Controlon TrustandCooperation

CONTROL

NecessaryCondition+)HlbHaOOPERATION Experiments& 2

Experiments&2

TRUST

H2(+)Experiment

COOPERATION

the inherent trustworthiness f these individualswould not be expected to differ acrossconditions.Eachobserverreceived the full experimentalpackage-scenario andresponses-fromone collaborator.The observer's task was to read these materials and to make severaljudgments regardingthe trustworthinessof the collaborator.More precisely, observersjudgedthe collaborator's rustworthinessndcooperativeness,and the degreeto whichthecollaboratorwas a teamplayer. Recall that we expect (andwill verify) thatparticipantsin the controlsystemconditionwill cooperatemore oftenthanparticipantsn the no controlsystemcondition. The tendencyof individualsto attributebehavior to dispositionalchar-acteristicssuggests that this control-induced ooperationwill lead to positive attributionsof the collaborators' rustworthiness. hus,we predictthat observerswill judge collabora-tors in the control system condition to be more trustworthyhan collaboratorsn the nocontrolsystemcondition(HIa) and thatthis effectwill be mediatedby observedcooperation(Hlb).


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488 Coletti, Sedatole,and Towry

Experiment1 ResultsTable 1 presentsdescriptivestatistics for Experiment1. We asked a numberof manip-ulation check questionsto ensure that participantsunderstood he scenariosand attendedto the manipulations.These manipulation hecks were answeredcorrectlyby substantiallyall participants, nd resultsare inferentially denticalif those participantsailing manipu-lationchecks areeliminated.9Perhapsmost importantly,we askedobserverparticipantsoidentify (1) the controlsystemcondition,and (2) the resourceallocationchoice made bythe collaborator articipanti.e., individualorjoint projects).Foreach manipulation heck,

TABLE 1Experiment 1DescriptiveStatistics

Panel A: CollaboratorChoicesCondition

No Control Control DifferenceSystem System U-statNumber (%) of participants investing high 5 15 102.5**resources in Joint Project (24%) (75%)(n = 21) (n = 20)Panel B: ObserverJudgments

ConditionNo Control Control DifferenceSystem System t-statMean Std.Deviation) atings f CollaboratorsbTrustworthiness 5.62 7.15 2.75**(1.83) (1.73)Team player 4.38 6.75 2.65**(2.97) (2.73)

Cooperativeness 5.43 6.70 1.76*(2.31) (2.30)(n = 21) (n = 20)*,**Groups ignificantly ifferentat p < 0.05 andp < 0.01, respectively, ne-tailed.aCollaboratorsnvesteda high level of resourcesn either thejointprojector individualprojects.h Observers atedcollaborators'rustworthiness,ooperativeness,nd the extent to which the collaborator as ateamplayeron a 1-10 Likert cale.

9 One exception s that ten out of the 41 collaborator articipantsespondedhatthe case statedtheyhad pre-viouslyexpresseda willingness o devote a low level of resources o thejoint project when,in fact,the casestates hat he divisionhead(theirassumed ole)hadexpressed willingness o commita highlevelof resources.However, hesemanipulationheckfailuresappear o havebeencausedby a misunderstandingf thequestion.In all butone of these cases, the collaborator's ctualchoice was to commithigh resources o the individual(i.e., notjoint) project.Thus, in this manipulationheck, these collaborator articipantsppear o have beenreportinghe choice they actuallymade,rather han the priorcommitment escribed n the case scenario theintendedquestion).Thisanomalydoes notpresent nferential oncerns or severalreasons.First, he ten collab-oratorsmissingthis questionwere fairly evenly distributed crossconditions: our were in thecontrolsystemcondition,and six were in the no controlsystem condition.Second,an examinationof the writers'essaysprovidedno evidenceof an actualmisunderstanding.n neitherconditiondid any writeralludeto a belief thathe hadnotmadea prior ommitmento devotehighresources o thejoint project.Finally, esultsare nferentiallyidentical f theseparticipantsreeliminated.TheAccountingReview,April2005

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TheEffectof ControlSystemson Trustand Cooperation 489

all but one observerparticipant orrectlynamedthe corresponding ontrol conditionandallocationchoice, indicating hatobserverparticipants ave reasonableattention o the de-tails of the experiment.In developingour hypotheses,we take as given thatparticipantswill cooperatemorein the presenceof the controlsystem thanwhen thereis no controlsystem. As presentedin Table 1, Panel A, ourexperimentalmanipulationsndeedprovidethis necessarycondi-tion. Recall thatin this experiment,a division'schoice to devotehighresources o thejointprojectrather hanindividualprojectsdemonstrates ooperation. n the no controlsystemcondition,only 24 percent(5/21) of collaborators hose to devote high resourcesto thejoint project.In the controlsystemcondition,75 percent(15/20) of collaboratorsdevotedhigh resources o thejoint project.The Mann-WhitneyU-testprovidesstatisticalevidencethat these proportions re significantlydifferent U = 102.5,p < 0.01, one-tailed).'tHypothesesla and lb are the primary ocus of Experiment1 and predictthatwhenobservingcontrol-inducedooperation,participantswill not fully attributehe cooperationto the presenceof a controlsystem. Specifically,Hla predictsthatthose collaboratorsnthe controlsystemconditionwill bejudgedas moretrustworthyhanthose in the no controlsystemcondition.Recall that each observerwas providedwith the completeexperimentalpackage(scenarioand responses,includingthe essay) of one collaborator.The observersthenanswereda series of questionson theirperceptionsof thecollaborators' haracteristics.While individualdifferences n innatetrustworthinessmay be revealedin the essays, notethat participantswere randomlyassigned to the controlsystemversusno control systemconditions.Thus,the inherent rustworthinessf participantss not expectedto varyacrossconditions so any systematicdifferencesin essays are the result of the control systemmanipulation.To test Hla, we rely on the responsesof those participantsn the roleof observer(seeTable 1, Panel B). The primarydependentvariable s (perceived)Trustworthiness,he ob-servers'Likert scale (1-10) level of agreementwith the statement, The participants atrustworthyndividual. A t-test finds that control system condition collaboratorswerejudged by their observersto be significantlymore trustworthyhan were the no controlsystem condition collaborators (7.15 versus 5.62; t = 2.75, p < 0.01, one-tailed). Thisfindingis particularlynotablebecause when the observerswere asked to recall whetherthere was a control system in place, only one answeredthis questionincorrectly.Thus,despitethe fact thatthe observersunderstood he economic incentivesfacing the collabo-rators,observers at least partiallyattributedhe collaborators'behaviorto their inherenttrustworthiness. I

Hypothesislb predicts hat the effect of a controlsystemon perceived rustworthinesswill be mediatedby cooperation.We conducta mediationanalysis using the three-stepmethodproposedby Baron and Kenny (1986). First, we establish that the independentvariable ControlSystem)has a significanteffect on the mediatingvariable Cooperation).This is accomplishedusing the resultsof the Mann-WhitneyU-testreportedabove (andin1o Because his scenario s notdefinedwith economicspecificity,we cannotcompare heactualcooperationevelsto any economicallyrationalized enchmarks.Rather,we can only provideevidencethat economicincentivesfavoredcooperationmore in the controlsystemcondition(due to the possibilityof economicsanctions f aconsultant eportedow cooperation)han n the no controlsystemcondition.As describedbelow,Experiment2 provides ufficient pecificationo compare hecooperationevels to whatwouldbe expected f an individualwere motivated nly to maximizewealth.TheHla result s corroborated itha MANOVA,n whichcontrol ystem(present r absent) s the independentfactor.The dependentvariablesare the Likertscale (1-10) levels of agreementwith threestatements, Theparticipants a trustworthyndividual, Theparticipants a teamplayer, nd Theparticipants acooperativeindividual. he result s consistentwiththe univariateest on the trustworthiness tatement.


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490 Coletti, Sedatole,and TowryTable 1, PanelA), which finds a significanteffect of the controlsystemon cooperationU= 102.5,p < 0.01, one-tailed).Second,we regress hedependentvariable Trustworthiness)on the independentvariable ControlSystem).This regression s statisticallyequivalent othe t-testreportedabove for Hla (andin Table 1, PanelB), and findsthat a controlsystemhas a significantly positive effect on perceived trustworthiness (t = 2.75, p < 0.01, one-tailed).Third,we regressthe dependentvariable Trustworthiness)n both the independentvariable(ControlSystem) and the mediator(Cooperation).This multiple regression(nottabulated) finds a significant coefficient on cooperation (t = 2.05, p < 0.05, one-tailed),and a nonsignificant oefficient on controlsystem (t = 1.41, p = 0.17, one-tailed).In sum, once we control for the effect of cooperationon perceived rustworthiness,hedirect effect of the control system on perceivedtrustworthinesss no longer significant.BaronandKenny(1986) pointout the need to comparenotonly the statistical ignificance,but also the absolute size of coefficients across regressions.Such a comparison indsthatonce we controlfor the effect of cooperationon perceivedtrustworthiness,he coefficienton the controlsystem becomes smaller(0.88 in the stage 3 regressionversus 1.53 in thestage 2 regression).Together, hese findings supportour Hlb prediction hatthe effect ofa controlsystem on perceivedtrustworthinesss mediatedby cooperation. n fact,we findthatcooperation erfectlymediates herelation,n thatthe directeffect of thecontrolsystemon perceived rustworthinesss not significantwhen the effectof cooperations controlled.12Experiment 2MethodWhile Experiment1 was designedto explorethe effect of controlon trust,Experiment2, whichprovidesa morepreciselyspecifiedincentivestructure, lso providesevidence onthe effect of truston subsequentcooperation.Furthermore,ince this experimentallowedparticipantso interactover multiple periods, participantswere able to developricherin-teractivehistories,an importantbasis for makingattributions f trustworthinessKramer1999).A total of 62 undergraduatejuniorand senior statusbusinessmajorsenrolledin fi-nance, marketing,audit and tax classes) and graduate(M.B.A. studentsenrolledin in-troductorymanagementaccountingclasses) studentswere recruited o participaten Ex-periment2. Each participantwas assigned to a two-personcollaboration,with eachcollaboration epresenting n independent bservation.While each personwas pairedwiththe same collaborationpartner hroughout he experimental ession, these pairingswereanonymous.Each personknew only the participantnumber,but not the identityof thepersonwith whom s/he was paired.Communicationamong participantswas completelyrestricted,andall decisions were madeand recordedvia a computernetwork.As in Experiment1, each participant ssumedthe role of an R&D managerat a largepharmaceuticalirm.For each period,s/he decidedhow muchof the division's R&D re-sources to devote to a joint R&D project.There were only two choices: a high level ofresourcesor a low level of resources.Participantsmadethis decision for 30 separatepe-riods-earning points based on his/her decisions, and those of his/her collaboration partner(i.e., the other division's R&D manager). At the end of the experiment, points were talliedand each participant was paid $1 for every 25 points earned.

2 Commitment Theory (Nesse 2001) alternatively suggests that a control system is a commitment signal if it isself-imposed. Since the control system in our study is imposed exogenously, it is unlikely to provide such asignal. However, the degree to which commitments are upheld is a potential alternate interpretationof observedcooperation, and hence of the mediating variable through which a control system may engender trust.The Accounting Review, April 2005

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TheEffectof ControlSystemson Trustand Cooperation 491The experimentalparameters re summarizedn Exhibit1. Eachparticipantncurredacost of 15 points if s/he decided to devote a high level of resources o the joint project.This cost providedan incentivefor the participantso devoteonly a low level of resourcesto thejoint project.However,the two collaborationmemberssharedthe income fromthe

joint project,and this income increasedwith the level of resourcesdedicated.Eachpartic-ipant's base payoff each periodwas 50 percentof the joint project'sincome minus theparticipant'sesourcecost. Forexample,if one participantelecteda low level of resourcesand his/her partner elected a high level of resources,then the participant arned a basepayoff of 15 points for that period (0.50*30 - 0 = 15) while the partnerearned abase pay of zero (0.50*30 - 15 = 0).

EXHIBIT 1Experiment2

Payoff StructurePanel A: Summary of Payoff Structure* If either collaborator devoted high resources to the joint project, that collaborator'sdivision was charged15 points.* Jointprojectprofitswere increasing n the level of resourcesdedicated o thejointproject:* If bothdivisionschose low,joint projectprofit= 10.* If one divisionchose low andone chose high,joint projectprofit= 30.* If bothdivisionschose high, joint projectprofits= 50.* Jointprojectprofitswere sharedequally by the two divisions.* ControlSystemConditionOnly-If the consultantvisited anddeterminedhatadivision hadcontributed igh resources, hat divisionwouldbe rewarded15 points.(Probability f consultantvisit = 80% each period.)Panel B: No Control System Condition-Normal Form RepresentationPayoff StructureaCollaborator 2

Collaborator1 low highlow* 5,5** 15,0high 0,15 10,10

Panel C: ControlSystem Condition-Normal Form RepresentationPayoff StructurebCollaborator 2

Collaborator1 low highlow* 5,5** 15,12high 12,15 22,22

'Represents evel of resourcesdedicated o thejoint project low or high).Representshe payoffto Collaborator andCollaborator, respectively.a Calculated s 50 percentof joint profitminusresource ost (15 pointsif the divisionchose high resources).bCalculated s 50 percentof joint profitminusresource ost (15 pointsif the divisionchose high resources)plus bonus(80 percentx 15 pointsif the division chosehigh resources).

Thisdeduction s analogous o the cost (unspecifiedn amount)of reducedperformancen individualprojectsin Experiment .The Accounting Review, April 2005

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492 Coletti, Sedatole,and TowryThe design includedone independent actor: the presence or absence of a controlsystem. In the controlsystemcondition,participantswere told that an auditorwouldmakerandomandunannounced isits to each division's site. At the end of these visits the auditorreportedo bothmanagers he level of resourceseachmanager ontributedo thejointR&D

projects.Thus, the controlsystem providedfeedbackregarding ach participant'shoicesto bothparticipants.The probabilityof a visit fromthe auditorwas 80 percent n a givenperiod,and if the auditorreported hat a managerhad selected a high level of resources,this managerreceived a 15-pointbonus.14 Again, participantswere randomlyassignedtoconditionssuchthatthe inherent rustworthiness f these individualswould not be expectedto varyacrossconditions.Withoutconsideringthe effects of the controlsystem (the periodicauditorvisits andassociatedbonus),all participantsaced a two-partysocial dilemma(i.e., a prisoner'sdi-lemma), where cooperation s a relevantsocial norm. Specifically,each participanthadindividual ncentives to dedicatea low level of resourcesto the joint project,while bothparticipants eceived a greaterpayoff if both contributedhigh resources hanif both con-tributedow resources.However,once the controlsystemis incorporated,he finalgame isno longera social dilemma.That is, when there was a controlsystem in place, it was ineach player'sindividualbest interest o cooperate(i.e., dedicatea high level of resources).Thus,we againassume thatparticipantsn thecontrolsystemconditionwill cooperatemoreoften thanthose in the no controlsystemcondition.Hypothesisla predicts hatparticipantsn the controlsystemconditionwill be judgedas moretrustworthyhanthose in the no controlsystemcondition.This predictiondependson theabilityof participantso observeeach other'scontrol-inducedooperation.Thereforewe allow for 20 periodsof play before assessing the perceivedtrustworthiness f eachparticipant'spartner.Once participants ompletedPeriod20, the experimenter nnouncedthatfor the final ten periodsthe auditorwould not visit. Participantswere reminded hatbecausethe auditorwould not be visiting, they would no longerlearntheir collaborationpartners' esource allocationchoices. Thus, in the periodsafter Period20, the incentivesgoing forwardare identical n the controlsystemandno controlsystemconditions.However,the conditionsdiffer in termsof the interactivehistoriesthat have developed.Beforeplayingthe last ten periods, participantsudgedthe likelihoodthat their collab-orationpartnerswouldbehavecooperatively.Specifically, hey answered, Howlikely is itthatyourpartnerwill select a high level of resources hesefinalperiods? on a Likert cale(1-7). Recall that ourdefinitionof trustmaybe conceptualized s the perceived ikelihoodthatanotherpersonwill cooperate,absentany economicincentivesto do so. Because thisquestionwas asked afterPeriod20, when the prospectof an auditor'svisit was removed,this questionoperationalizes urdefinitionof trust.'5Hypothesesla and lb jointly predictthat this perceivedlikelihoodwill be greaterfor those participantsn the control systemconditionthan for those in the no control system condition.Hypothesis2 predictsthatsubsequentcooperationwill be greaterfor those collaborations hat exhibit greater evelsof trust.We test H2 by examiningthe level of cooperation n the last ten periods.

'4 Because Experiment used actualmonetarypayments,we had to preciselydefine how this pay would becalculated. n describing he algorithm,we could have usedeithera bonus or a penaltyscheme. We report heresults romusinga bonusscheme.However, dditionalxperimentalatawerecollectedusinga penalty cheme.Resultsfrom this versionof the experiment reinferentiallydentical o thosereported ere.'~ Rather hanaskingdirectquestionsabout he partner'srustworthiness,ntegrity, tc., we made thisquestionasemotionallyneutral s possibleso thatdecisions n the remainingenperiodswere notunintentionallyffected.


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The Effect of Control Systems on Trustand Cooperation 493

Experiment2 ResultsTable 2 presentsdescriptivestatistics for Experiment2, and the trends n cooperationare picturedin Figure 3. Because of the computerizednatureof the experiment,basicmanipulation heck questionscould be asked after the instructionsbut before the partici-pantstook partin the experiment.These questionstook the form of a four-questionquiz,and all questionshad to be answeredcorrectlybefore the participant ould begin the ex-periment.Therefore,all participants assedall manipulation hecks.

TABLE 2Experiment2DescriptiveStatistics

ConditionNo Control Control DifferenceCollaboratorChoices System System t-statMean(StandardDeviation)Cooperation-Periods 1-20a 17.67 34.56 8.97**(6.41) (3.85)Averageper period(Total/20) 0.88 1.73

Cooperation-Periods21-30b 7.80 10.88 1.78*(4.01) (5.45)Averageper period(Total/10) 0.78 1.09Trustc 4.23 5.06 2.17*(1.21) (0.91)(n = 15) (n = 16)

*,**Groups ignificantly ifferentat p < 0.05 andp < 0.01, respectively, ne-tailed.Cooperation-Periods1-20 is the cumulativenumber f timesthe two peoplein a partnershiphose todedicatea high level of resources o thejoint projectduring he first20 periods range:0-40).b Cooperation-Periods21-30 is the cumulativenumber f times the two peoplein a partnershiphose todedicatea high level of resources o thejoint projectduring he last ten periods range:0-20).cTrust s the collaborators' ssessmentof theirpartners'rustworthinessn a 1-7 Likert cale.Specifically,collaboratorsnswered Howlikely is it thatyourpartnerwill selecta high level of resourceshesefinalperiods? fterbeingtold that no controlsystemwould be in placefor thosefinal tenperiods periods21-30).

FIGURE 3Trends in Experiment22.5

c 2 ControlSystem

a.1.511 6 11 16 21 26

Period


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494 Coletti,Sedatole,and TowryThe first purposeof Experiment2 is to corroborate he HIa and Hlb results fromExperiment1, using a more preciselyspecifiedeconomic structure.After reporting heseresults,we proceedto H2, the testing of which is the primarypurposeof Experiment2.We again assume(andtest) thatcooperation s higherfor those participantsn the control

systemconditionthanfor those in the no controlsystemcondition; hat is, participantsnthe controlsystemconditionwill exhibit the control-inducedooperationnecessary ortrustto develop.The dependentvariable or this test is Cooperation-Periods 1-20, the cumu-lative numberof times the two people in a collaboration hose to dedicatehigh resourcesto thejoint project n the first 20 periods.For a given period,this variablecould equal0,1, or 2, representing collaboration n which neither,one, or bothpartnersdedicatedhighresources o thejoint project.Thus,the cumulativevariable or all 20 periodsrangesfrom0 to 40.16 In Table2, a t-test confirmsthat collaborationsn the controlsystemconditioncooperated chose high resources)moreoften in the first20 periodsthan teams in the nocontrol system condition (34.56 versus 17.67; t = 8.97, p < 0.01 one-tailed), satisfying thenecessaryconditionthat the controlsysteminducescooperation. 7Hypothesisla predicts hat othercollaboratorswill positivelyattribute he documentedcontrol-inducedooperationo the collaborators'rustworthiness. ecall thatin Experiment2, after 20 periodsof play,participantsn the controlsystemconditionwere informed hatthe auditorwould not visit again.Thus, participantsn the controlsystemand no controlsystemcondition faced the same no control system situationgoing forward n the finalten periods.After the announcementwas made,all participantsssessed the likelihood(ona Likertscale) thattheircollaborationpartnerswould dedicatehigh resourcesto thejointproject n the final ten periods.This variable,Trust,operationalizes urconceptof trustasthe perceivedlikelihood that a partnerwill cooperate,absentany economic incentives todo so. In Table 2, the responsesare averagedfor each pair, and a t-test confirmsthatparticipantsn the controlsystemconditionexpecta higher evel of cooperation hanthosein the no control system condition (mean Trust values of 5.06 versus 4.23; t = 2.17, p< 0.05, one-tailed).This supportsHla, and allows us to conclude that the controlsystemhad a positiveeffect on trust.Hypothesislb predicts hat the effect of a controlsystemon trustwill be mediatedbycooperation.As for Experiment1, we conducta mediationanalysis using the three-stepmethodproposedby Baron and Kenny (1986). First, we establish that the independentvariable ControlSystem)has a significanteffect on the mediatingvariable Cooperation).This is accomplishedusing the t-test reportedabove (and in Table2), that documentsasignificantpositive effect of the controlsystem on Cooperation-Periods 1-20 (t = 8.97,p < 0.01). Second,we regressthe dependentvariable Trust)on the independentvariable(ControlSystem).This regression s statisticallyequivalent o the t-testreportedabove forHla (andin Table2), andfinds thata controlsystem has a significantlypositiveeffect on'6 The average otalcollaboration esources n periods1-20 is significantly reater hanthe economicpredictionof 0 in the no control ystemcondition t = 10.7,p < 0.01), andsignificantlyess than heeconomicpredictionof 40 in the control ystemcondition t = 5.7, p < 0.01). Thus,while economic actorsplaya role,as evidencedby the significantdifference n cooperation crossconditions,otherfactors, uch as individualpreferences ndsocial norms,are also factors n determininghe level of cooperation.7 Multipleperiod games such as ours often afford the opportunityor trendanalysis (e.g., repeatedmeasuresANOVAs). Such analysis is difficult in our setting because, for each period, the dependent variable is trichot-omous, atherhancontinuous. owever,asualobservationf changesn cooperationver imereveals o

trends, argelybecauseourcontrolsystemwas strongenoughto providenearperfectcooperation, ven in theearliestperiods(e.g., the average evel of cooperationn the firstfive periodswas 1.7 out of 2 in the controlsystem condition).


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TheEffectof ControlSystemson Trustand Cooperation 495Trust(t = 2.17, p < 0.05, one-tailed).Third,we regressthe dependentvariable Trust)onboth the independentvariable ControlSystem)and the mediator Cooperation).This mul-tiple regression not tabulated) stimatesa significantcoefficienton Cooperation--Periods1-20 (t = 2.26, p < 0.01, one-tailed),and a nonsignificant oefficienton controlsystem(t = 0.75, p = 0.46, one-tailed). In other words, once we control for the effect of coop-eration on trust,the directeffect of the controlsystem on trustis no longer significant.Further, nce we controlfor the effect of cooperationon trust, hecoefficienton thecontrolsystem becomes smaller(0.26 in the stage 3 regressionversus 8.45 in the stage 2 regres-sion). Thus, as is true for Experiment1, we find that cooperationperfectlymediatestheeffect of the controlsystem on trust(i.e., perceived rustworthiness).While the Hla, and H b results fromExperiment1 were corroborated y the Experi-ment2 results,the most significantpurposeof Experiment2 was to investigate he effectof trust on subsequentbehavior and in the absence of the control system. Hypothesis2predictsthatthe level of cooperationwill be greater or collaboratorswith higherpercep-tions of eachother'strustworthiness.he independent ariable orthis test is the dependentvariablefrom the test of Hla, the perceivedlikelihoodof cooperation n Periods 21-30when the possibility of an audit exists in neither condition (i.e., Trust).The dependentvariable s Cooperation-Periods 21-30, measuredas the cumulativenumberof times thetwo people in a partnershiphose to dedicate a high level of resources o thejoint projectduringthe last ten periods.This variablerangesfrom0 to 20, with 20 representing pairin which both participants hose high resourcesin each period.A simple regressionofCooperation-Periods 21-30 on Trust (see Table 3) finds a significantlypositive effect(coefficientof 2.40; t = 3.49, p < 0.01, one-tailed).Thus,H2 is supported, nd we concludethat,uponthe removalof the controlsystem,the level of cooperations greater or collab-oratorswith higherperceptionsof each other's trustworthiness.

The majorimplicationof this findingis that the effect of control on cooperation sreinforcedby the trustengenderedby control.In periods21-30, no controlsystem is inplace in eithercondition,and any difference in cooperationmust be due to the level oftrustgeneratedby the experiencesin the earlierperiods.FromTable2, we find thatre-moving the control system does lead to an overall decrease in cooperation.'8Even so,participantsn the controlsystemconditioncooperate(dedicatehigh resources o thejointproject)significantlymore in the final ten periods(i.e., following removalof the controlsystem) thanparticipantsn the no controlsystemcondition(10.88 versus7.80; t = 1.78,p = 0.04, one-tailed).A trendanalysispresented n Figure3 highlightsthatmost of the drop-offin cooper-ationoccurred n the firstfew periodsafterPeriod20, withcooperation evels hittinga lowpoint of 0.9 in Period24. This rapiddecline in cooperation ikely reflectsa growing ap-preciationof the change in the incentivestructureand its effect on partnercooperation.After this point,cooperation evels seemed to stabilize.Notably,even afterthe erosion incooperationwhen the control system is removed,some residualeffect of trust seems toremain.Specifically,cooperation n the final seven periodsis higherin the controlsystem8 Considering only the control system condition, the average level of cooperation was 1.7 (out of 2.0) in periods1-20, and 1.1 (out of 2.0) in periods21-30. The WilcoxonSignedRanks est confirms hattheseproportionsare significantlydifferent Z = 3.18, p < 0.01). This finding llustrates hatparticipants ot only understoodthat hecontrolystem adbeenremoved utalteredheirbehaviorsccordingly.oensurehat hisdifference

is due to the removalof the controlsystem,rather hanend-of-game ffects,we confirm he comparison singonly the two, four, six, or eight periodson eitherside of period20. In all cases, we find thatcooperationdecreased ignificantly fterperiod20.


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496 Coletti,Sedatole,and Towry

TABLEExperimentRegressionf Cooperation-Periods 1-30 on TrustModel: Cooperation-Periods 21-30i = 1N + P,Trusti + Ei CoefficientDependentVariable:Cooperation-Periods 1-30 (t-statistic)Intercept -1.788(-0.543)Trustb 2.397**(3.487)F-statistic 12.152**Adjusted R2 27.1%n (collaboration scores) 31** Estimate s statistically ignificant t p < 0.01 (one-tailed)a Cooperation--Periods1-30 is the cumulativenumber f times the two peoplein a partnershiphose todedicatea high level of resources o thejoint projectduring he last ten periods range:0-20).STrust is the collaborators' ssessmentof theirpartners'rustworthinessn a 1-7 Likert cale. Specifically,collaboratorsnswered Howlikely is it thatyourpartnerwill selecta high level of resources hesefinalperiods? fterbeingtold that no controlsystemwould be in placeforthose finaltenperiods(periods21-30).This Likert cale response s averaged crossthe two members f each collaborative artnership.

condition than in the no controlsystem conditionat a marginallystatisticallysignificantlevel (F = 1.75, p = 0.09, one-tailed).Thus, we conclude that despite the potentiallynegativeeffects discussedin theprior iterature,ontrolsystemscanactuallyenhance rust,and this enhancedtrustcan increase futurecooperation.

IV. CONCLUSIONIn summary, his paper nvestigates he use of controlsystems to reducerelational iskandincreasetrustandcooperationn collaborative nvironments.Weprovideevidence thatin collaborative ettings,control nducescooperation,which,in turn,positivelyaffects trust.Specifically,controlsystemsaimedat reducingrelational iskpromotegreatercooperation,whichis observedby participatingollaborators.Thisobservedcooperativebehaviorallowscollaborators o buildtrustin one another,and this trust reinforcesthe positiveeffects ofthe controlsystemin eliciting futurecooperation.Thus,theeffectof controlon cooperationis reinforcedby the trustthat it engenders.This findingis particularlynotable,given thelargebody of literatureuggesting ust the opposite-that controlsystems reducetrust.The findingsof this study have several implications or academicresearch.Priorre-searchsuggeststhatthe presenceof controlsystems reducestrust.However,these studieshold cooperationevels constantor do not providefeedbackon collaborative ooperation,and,therefore,underestimatehepotentialbenefitsof strongcontrolsystems.Ourstudy,onthe otherhand,providesevidencethatcontrolsystems can, in fact, lead to higherlevels ofperceived rustworthinessnd,ultimately, uturecooperation.Themediatingrole of control-inducedcooperationprovidesthe mechanismby which this positive effect occurs. Takentogether, he results of this studysuggest an increasingmarginalbenefitof controlsystemstrengtharising from the trustthatobservedcontrol-induced ooperationengenders.Theimplication s that firmswill choose to implementa strongercontrolsystemthanpreviousresearchwould seem to suggest.TheAccountingReview,April2005

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TheEffectof ControlSystemson Trustand Cooperation 497The findingsof this researchalso have implicationsfor the practiceof managementaccounting,specifically,in the design and implementation f control systems in collabo-rativesettings.Note that the trust-building enefitsof control exhibitedin this paper maynot be experienced n collaborative ettingswithoutfeedbackmechanisms-that is, in set-

tings in which control-induced ooperationcannot be observed.This implies that somecontrolmechanisms-namely, monitoringand mutualperformancemeasurement-may bemoreimportantn collaborative ettingsthanpreviouslyrecognized.Moreover,because ourtheorysuggeststhat the trustbenefits of control accrueover time(i.e., via observationofcontrol-inducedooperation), he timingof the implementationf controlsystems maybeimportant.The earliera strongcontrolsystem is put into place, the largerarethe ultimatetrustand cooperation evels achieved.McKnightet al. (1998, 475) suggest that the ro-bustness of trustdepends,in part,on structural ssurances elated o thesecurityonefeels abouta situationbecause of guarantees, afetynets,or otherstructures. y providingthese structural ssurances, trongcontrolsystemscan providefor highlevels of trustearlyin the collaborative elationship.These implications or managementpractice suggest thata closer examinationof theeffect of control on trust and cooperationover time is warranted. n particular,uturere-searchshould examinewhetherthe trustengenderedby observedcontrol-inducedooper-ation is self-sustaining.Figure I suggests that reductionsin control necessarilylead toreductionsin trust.However,if trust is self-sustaining, t may be possible to maintaincooperationevels while simultaneously educing he strength and,hence, the cost) of thecontrolsystem. If true,then this would help explainthe existenceof successfulcollabora-tions thatappearto be governedby weakerexplicit controlmechanisms.Furthermore,twould provideeven more supportfor the notion that firms should implementstrongercontrolsystems in the earlieststages of a collaboration.Onelimitationof the current tudyis our choice to modelonly intra-firm ollaborationswithinthe experimentaldesign-that is, we focused on teams withina firm. Because ourtheoryapplies to collaborationsn general,and does not dependon the collaboration x-isting withinthe boundariesof a firm,we expect our resultsto applyto inter-firm ollab-orationsas well. There are, however,differencesbetween intra-and inter-firm ollabora-tions, one of which is the cognitivepredispositionof intra-firm ollaborators o feel as ifthey are on the same team. Indeed,Towry(2003) documentsthatthis sense of teamidentity ncreases heprobability f cooperation.While we know of no theoriessuggestingthatsuchaneffect wouldnegatethefindingsof the current tudy,we leave to futureresearchan investigationof the degreeto which our findingsgeneralizeto inter-firm ollaborativesettings.A secondpotential imitationof the current tudyis our choice to use a relatively trongcontrolsystem. The next logical step is to identifythe boundaryconditionswithin whicha controlsystem will positively affect trust. For example,a weakercontrol system mayprovidea feedbackmechanism,butfail to providestrongenough ncentives orcooperation.In sucha case, the feedbackmayrevealshirkingand, as a result,leadto heightened evelsof distrustamongcollaborativepartnerssee Figure1, PanelB). Moregenerally,a fruitfulavenuefor future research ies in providingmore insight into the role of information nstrengtheningor weakening) he linksbetweencontrol,trust,andcooperation dentified nthis paper.

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