SYNOPSIS

This study investigates how formal control systems and the behavior of peers influence behavior in accounting settings with imperfect controls. We manipulate formal controls and social norms in a laboratory experiment, allowing us to precisely investigate the interactive effect of these two factors on behavior. We provide evidence that when initial controls are strong and subsequently weakened, individuals behave in a more self-interested manner in subsequent settings than individuals who are in a setting where initial controls are weak and subsequently strengthened. We also provide evidence that individuals conform more to social norms that conflict with the behavior that changes in formal controls induce. Finally, we find that individuals preferentially attend and conform to the self-interested actions of peers (as opposed to the socially interested actions of their peers), causing self-interested norms to be “stickier” than socially interested norms for behavior.

JEL Classifications: M40; M41; M49; C91.

Data Availability: Contact the authors.

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