The perceived strength of an implied contract: Can it withstand financial temptation?

Abstract

A time-frame paradigm is applied to investigate the effect of financial incentives on the decision to complete an implied contract. This paradigm has two advantages: (1) prior costs/benefits and incremental costs/benefits are considered separately so that their effects can be assessed systematically, and (2) decision strategies of individual subjects can be identified by looking at behavior patterns across various cases. Business students who had been exposed repeatedly to the concept of differential costs were asked to decide about four versions of a summer-work problem. Subjects were to assume that they had agreed to perform a summer job. Part way through, an alternative job becomes available. Subjects had to decide whether to complete the original job or switch to the alternative. The four versions varied in the costs/benefits for completing or failing to complete the job. The results of Experiments 1 through 3 revealed: first, a strong propensity to continue (over 80% continue decisions) across all versions; second, most students were consistent with a strong momentum (always continue) strategy; third, commitment was rated as the most important reason for continuing; and fourth, the results generalized for three groups of business students varying in background and sophistication at three universities. Experiments 4 and 5 revealed, first, that including a financial statement led to more logical behavior and, second, that the results were not due to computational errors by subjects. These findings suggest that business students have a schema for recognizing differential costs, but that this schema was not evoked in the original studies. The results have implications for the effects on decision making of (a) allocation of resources with implied contracts, (b) personal commitment, (c) individual differences, and (d) generalizability of results.