Subjective Evaluation: the Role of (institutionalized) Conflict for Motivation

Abstract: In the management literature the need to reduce organizational conflict is a frequent topic. Economists, in contrast, have argued that functional employment relationships require a certain level of conflict, because a healthy conflict culture helps to overcome incentive problems caused by incomplete contracts and asymmetric information. In this paper we use a laboratory experiment to explore the role of conflicts in a principal-agent setup with subjective performance evaluation. We provide empirical evidence that conflicts can indeed be efficiency-enhancing even in complex environments. At the same time, however, our study also demonstrates that establishing a conflict culture is a delicate matter. If conflicts are encouraged in a careless, hands-off manner, the destructive side of conflicts is likely to dominate. A functioning conflict culture requires a careful management of norms. In our experiment we find that conflicts have positive net effects only if an explicit code of conduct is established and conflicts are institutionalized through a grievance process.