The unintended effect of monetary incentives on shirking in manufacturer–reseller relationships

Abstract

Purpose This study investigates how temporal changes in manufacturer monetary incentives influence reseller behavior within manufacturer–reseller relationships. We theorize, using agency theory, and examine empirically how the manufacturer's incentive changes have complex and unintended effects on the reseller's shirking, ultimately shaping the manufacturer's economic performance. Design/methodology/approach We test our hypotheses on the effect of incentives using data from two successive surveys of exporting manufacturers in partnerships with foreign resellers, together with archival sources. Findings We observe a U-shaped relationship of monetary-incentive changes with shirking. The results reveal that when monetary incentives are decreasing (left-side of the U), their effect on reseller shirking is negative, but when they are increasing (right-side of the U), they can have a positive effect on shirking. The U-shaped relationship steepens when import market GDP growth is high. Practical implications Manufacturer managers should scrutinize and even resist reseller requests to increase monetary incentives because in most cases, the intended positive act of boosting incentives leads to an unintended increase in reseller shirking and a reduction in manufacturer performance. Originality/value We adopt a novel approach that examines intertemporal changes in monetary incentives within manufacturer–reseller relationships. Our findings add to modern thinking on agency theory, which views the level of convergence between the principal's and the agent's economic interests as a dynamic process shaped by wider considerations pertaining to relationship status.