Agency Costs of Moral Accounting in Hierarchical Relationships

Agents can face financially profitable, but immoral decisions as part of their job to increase their principals’ profits. According to prior research, these decisions might create the desire to compensate for them and to balance moral accounts as it has been shown that individuals tend to increase spending on a moral cause after immoral decisions. This so-called “moral cleansing” would lead to agency costs if agents use their principals’ resources to pay for the moral activities. To examine whether a financially profitable, but immoral decision results in agency costs and whether this is affected by the person responsible for the immoral decision I conduct a 2 (Morality: morally neutral vs. immoral decision) x 2 (Source of Responsibility: principal vs. agent) between-subjects experiment. I predict that agents increase their use of firm resources to pay for moral cleansing activities when principals are responsible for the immoral decision and that this moral cleansing is weaker when agents are responsible. The underlying intuition is that agents in the former case have few concerns to use firm resources, but find it harder to justify the use of firm resources in the latter case: further, agents’ moral identity may be less compromised when they can justify their behavior as just “doing their job”. Results support my predictions. While spending of firm resources on a moral cause is higher when principals are responsible for an immoral decision compared to a morally neutral decision, moral spending is not higher when agents are responsible. Supplementary analyses provide further insights: regardless of the Source of Responsibility, profiting from an immoral action increases agents’ fairness concerns; however, only when principals are responsible for an immoral action, this increases moral cleansing activities. Further, I find no evidence suggesting that agents use private resources to compensate for their own immoral actions. This is consistent with agents disengaging morally when they are “doing their job”. This implies that agents seem to use primarily firm resources to manage balanced moral accounts, which emphasizes the importance of an agency perspective.