a person–organization discontinuity in contract perception

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MANAGEMENT SCIENCEVol. 59, No. 12, December 2013, pp. 2837–2853ISSN 0025-1909 (print) � ISSN 1526-5501 (online) http://dx.doi.org/10.1287/mnsc.2013.1745

© 2013 INFORMS

A Person–Organization Discontinuity in ContractPerception: Why Corporations Can Get Away

with Breaking Contracts But Individuals Cannot

Uriel HaranDepartment of Management, Ben-Gurion University of the Negev, Beer-Sheva 8410501, Israel,

[email protected]

Most legal systems in the world follow the principle of corporate personhood, which grants organizationsthe same legal status as natural persons. Although debate over the notion of corporate personhood has

been fierce, whether and how this principle is applied in people’s beliefs and intuitions has yet to be empiricallyexamined. This work addresses the gap in the literature, in the context of formal contracts. While contracts aretypically seen as either morally binding promises or morally neutral business instruments, the data presentedhere show that contracts of individuals are associated more strongly with promises than are contracts of organi-zations. As a result, breach of contract by an individual is seen as a moral transgression. The same behavior byan organization, however, is viewed more as a legitimate business decision. This paper also finds that contractualobligations should be phrased in “promise” terms to eliminate this person–organization discontinuity.

Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1745.

Key words : corporate personhood; moral judgment; breach of contract; moral heuristics; corporate regulation;organizational perception; contract theory

History : Received May 17, 2012; accepted March 1, 2013, by Yuval Rottenstreich, judgment and decisionmaking. Published online in Articles in Advance July 19, 2013.

1. IntroductionOne of the most controversial issues in corporate reg-ulation is the legal status of corporations as natu-ral persons. The U.S. Supreme Court’s assumptionof corporate personhood, which most other coun-tries have also adopted, grants corporations the sameprovisions of the Bill of Rights as those enjoyedby individual citizens. However, for this assump-tion to be both practically applicable and impervi-ous to abuse, people’s perceptions of and reactions toboth corporations and individuals should be equal.Although the literature in law and philosophy is ripewith normative arguments both for and against theequal treatment of corporations and individuals, thequestion of whether corporate personhood exists inpeople’s minds—expressed via their judgments andbehavior—has not been tested.

One business activity in which corporate person-hood plays a key role is the contract, about whichthe law makes two important claims. One is thatboth individuals and business organizations can signthem. The other (prevalent mostly in the UnitedStates) is that breaching a contract is permissible, solong as the aggrieved party receives adequate mon-etary compensation for losses incurred due to thebreach. In contrast, research has shown that people

recognize that contracts contain an inherent moralcomponent, and correspondingly, they regard con-tract breach with reproach. Expanding on previousresearch, this paper suggests that the contract’s moralcomponent is weighted more heavily for individualsthan for organizations. Consequently, although peo-ple may judge an individual’s breach of contract as aviolation of a moral norm, the same behavior by anorganization is often viewed as an act of business pru-dence. Indeed, this difference may ultimately benefitthe organization by reducing the social costs associ-ated with a breach.

1.1. Corporate Personhood and Perceptions ofIndividuals and Organizations

For nearly 200 years, the U.S. Supreme Court hasmaintained that corporations should be granted thesame provisions of the Bill of Rights as naturalpersons (Mayer 1990). In the 1819 case of DartmouthCollege v. Woodward,1 the Supreme Court recognizedcorporations as having the same rights as natural per-sons to contract and to enforce contracts. The Courtlater generalized this assumption when it decreedthat a corporation is a person for purposes of the

1 Dartmouth College v. Woodward, 17 U.S. 518 (1819).

2837

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Haran: Person–Organization Discontinuity2838 Management Science 59(12), pp. 2837–2853, © 2013 INFORMS

14th amendment, which specifies rights of citizenship(Santa Clara County v. Southern Pacific Railroad).2

A century later, the notion of corporate personhoodgained momentum through a series of importantlegal decisions. For example, a textile corporation suc-cessfully invoked the fifth amendment in a criminalantitrust action (United States v. Martin Linen Sup-ply Co.),3 a consortium of major corporations soughtto overturn restrictions on corporate spending onpolitical campaigns by arguing that these restrictionsviolated their first amendment rights (First NationalBank v. Bellotti),4 and an electrical and plumbing con-cern cited the fourth amendment to prevent federalhealth and safety inspections (Marshall v. Barlow’sInc.).5 In these and in many other cases, the courts,by ruling in favor of the corporations, protected thelatter’s constitutional rights as legal persons.

Corporate personhood has also garnered strongopposition. Most of the criticism focuses on its rolesin increasing social inequality (Quigley 2003), cre-ating ambiguities in theoretical definitions (Millon2001), and introducing anomalies to legislature(Greenblum 2005). Several theorists (e.g., Manning1984, Markovits 2004) have argued that whereas indi-viduals’ moral status dictates that they be treatedaccording to the moral codes of conduct of everydaylife, organizations have no comparable moral status.Markovits (2004, p. 1465) even stated that “organiza-tions should be treated precisely as mere means, andsomeone who treats an organization as an end in itselfmakes, at least presumptively, a moral error.”

Despite the richness of the normative literature oncorporate personhood and the moral attributes of cor-porate actions (Laufer 1996, Moore 1999), descriptiveresearch on the term’s meaning or on its applica-tion to people’s judgments has been scarce. Empiri-cal behavioral research, however, has generally foundthat people perceive individuals and organizations aspossessing different traits and behavioral tendencies.Knobe and Prinz (2008, p. 76) examined how peo-ple assign mental states to different types of agents,including individual human beings and corporateentities. They found that while individuals ascribeactions, opinions, and thoughts to both persons andcorporations, they apply phenomenal states (i.e., feel-ings) only to people, and they “don’t think corpora-tions are capable of feeling anything.” Similarly, Grayand Wegner (2010) report that an organization (specif-ically, Google) was found to differ from human agentsin that it was rated high in agency (the ability tocarry out actions) but very low in experience (the

2 Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1876).3 United States v. Martin Linen Supply Co., 430 U.S. 564 (1976).4 First National Bank v. Bellotti, 435 U.S. 765 (1977).5 Marshall v. Barlow’s Inc., 436 U.S. 307 (1977).

ability to experience feelings). Human targets, con-versely, received moderate to high ratings on bothdimensions.

Proponents of corporate personhood argue that thecorporation is a collection, or aggregate, of its indi-vidual human constituents (Ripken 2009), and as suchit should be perceived and treated the same as theindividuals of which it consists. The U.S. SupremeCourt has subscribed to this view, stating that “[a]corporation is, after all, but an association of individ-uals under an assumed name and with a distinct legalentity” (Hale v. Henkel, p. 76).6 Empirical research,however, has shown that this argument, too, is incon-sistent with people’s perceptions and behavior. Stud-ies have shown systematic differences between theattitudes toward individuals versus those towardgroups (Malle 2010). For example, Hoyle et al. (1989)found that people expect interaction with a groupto be more abrasive than similar interaction with anindividual. Studies of group behavior suggest thatthis expectation is often warranted, as groups tend tobehave more selfishly than individuals in game exper-iments (Bornstein et al. 2004, Bornstein and Yaniv1998, Wildschut et al. 2007). Moreover, they also tendto utilize deceit more frequently than individuals,especially when the deception entails a benefit forthe group (Cohen et al. 2009). Taken together, thesefindings suggest that human intuition and behaviormay not always be in line with the legal assump-tions that constitute corporate personhood. This paperaddresses these potential inconsistencies.

1.2. Different Conceptualizations of ContractsThis work explores the differences in how individualsand organizations are perceived in terms of contracts.The law makes no distinction, and therefore, as con-tracting parties, individuals and businesses have thesame legal status. Whether a contract is authorizedwith an individual’s signature or a corporate seal, therules of its enforcement are identical. At the sametime, contracts are a complex construct that can beconceptualized and interpreted in a number of differ-ent ways, which may potentially affect the aforemen-tioned differences in perceptions of individual andorganizational actors.

One view of a contract is that of an economic instru-ment, useful only as long as it promotes the welfareof its parties. According to this approach, when itdoes not increase the signer’s welfare, walking awayfrom a contract is as legitimate a business decisionas signing one. The only universal consequence ofa legally binding contract is that the promisor mustpay damages if the promised event does not cometo fruition (Markovits and Schwartz 2011). U.S. law

6 Hale v. Henkel, 201 U.S. 43 (1906).

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Haran: Person–Organization DiscontinuityManagement Science 59(12), pp. 2837–2853, © 2013 INFORMS 2839

is consistent with this view, and neither enforcesthe completion of contracts nor prescribes sanctionsagainst a breaching party, beyond paying damages tothe other party. Thus, when the benefit of breachingthe contract exceeds the cost of the damages to bepaid to the aggrieved party, an “efficient breach” canoccur (Friedmann 1989).

Other legal and moral theories view contracts ashaving a substantial moral component (MacNeil 1985,Zamir and Medina 2010). They argue that a contract isin effect an exchange of promises (Farnsworth 1999),and breaking a promise is impermissible, regard-less of the effects it may have on the promisee(Fried 1981). Rousseau (1989) uses the term “psycho-logical contract” to describe the beliefs in recipro-cal and promised obligations between employee andemployer. Violations of these psychological contractshave significant effects on trust, job satisfaction, andemployee turnover, similar to the effects of a breachof a formal work contract by the employer (Robinsonand Rousseau 1994).

Empirical research has also identified a perceivedmoral component in formal contracts (for a review,see Eigen 2012a). Wilkinson-Ryan and her colleagues(Wilkinson-Ryan and Baron 2009, Wilkinson-Ryanand Hoffman 2010) found that people are sensitiveto the moral dimensions of a breach of contract,and equate willful breach of contract with deliberateharm. Breaching a contract, they argued, creates in itsvictims a feeling of injury similar to that of a brokenpromise, which cannot be fully remedied with money.Lewinsohn-Zamir (2012) found that perceptions ofa contract’s outcome greatly depend on how thatoutcome was attained (i.e., whether the fulfillmentof the contractual obligations was willful or forced).This sentiment is also evident in people’s adher-ence to formal contracts. Irlenbusch (2004) tested theextent to which exchange transactions are affected bywhether the contracts that define them carry a breach-ing penalty. Results showed that adherence rates tocontracts were similar in both conditions, demonstrat-ing that people do not exclusively follow materialcost–benefit concerns when deciding on whether ornot to honor a contract. Together, these findings showthat although the law allows breaching a formal con-tract, people expect individuals who sign contractsto abide by the same moral norms that guide theirpromise-keeping behavior. Indeed, business peoplereport that norms of keeping one’s word and main-taining an environment of commitment and trust areimportant to their jobs and work outcomes (Dyer andSingh 1998, Macaulay 1963, Vosgerau et al. 2008).

1.3. A Person–Organization Discontinuity inContract Perception

The objectives of the current work are twofold: to fillthe gaps in the literature on corporate personhood

and contract perception, and to propose an interven-tion to reduce or eliminate the bias in how contractsare judged. First, as discussed in the previous sec-tions, the literature on corporate personhood lacks ananalysis of whether people accept the legal assump-tion that the actions of individuals and of organiza-tions are equivalent and should be judged as such.Also, whereas people’s perceptions of formal con-tracts have been the focus of some research, theeffects of different signing parties have not been stud-ied. The current work therefore examines the effectthat different types of signers have on people’s judg-ments of contracts. Although the law does not distin-guish between individuals and organizations actingas contracting parties, it is unclear whether peopleuse the same moral principles to judge an organiza-tion’s contract that they do to judge an individualperson’s contract. In her definition of psychologicalcontracts, Rousseau (1989) argued that only individ-uals can have psychological contracts. Organizations,she posited, may provide the context for the creationof such contracts, but cannot “perceive” as individu-als do, and therefore, they cannot have psychologicalcontracts with their employees. This subjective feel-ing of mutual obligation characterizes human behav-ior but not organizational behavior. Consistent withthis line of reasoning, I suggest that sensitivity to acontract’s moral, obligation-related meaning is higherwhen the signer is an individual than when it isan organization. An organization’s contract, on theother hand, might be viewed more through its def-inition as a business instrument. Consequently, con-tract breach by an individual would be perceived asa moral transgression, similar to breaking a morallybinding promise, whereas a breach of the same con-tract by an organization would be seen more as alegitimate business decision.

In addition to identifying the person–organizationdiscontinuity that characterizes people’s perceptionsof contracts, this work offers a simple and subtleintervention to eliminate bias in how contracts areperceived. Specifically, the formation of an explicitassociation between the contract and a promise—accomplished by phrasing organizational contrac-tual obligations in promise terms—can eliminatethe discrepancies between people’s reactions to con-tract breaches by organizations versus those byindividuals.

This paper includes seven experiments, all con-ducted online. Participants in these experiments wererecruited via Amazon.com Mechanical Turk (seeKrantz and Dalal 2000 and Paolacci et al. 2010 forreviews of this method and participant pool).

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2. Experimental Design and Results2.1. Experiment 1: A Person–Organization

Discontinuity in Breach of ContractExperiment 1 examined whether people’s reactionsto breaches of contract differ when the violator isan individual versus when it is an organization.I hypothesized that a contract breach by a person willbe judged more harshly than that by an organization.Likewise, such a transgression by a corporation willbe perceived more within the framework of a legiti-mate business decision than when the breaching partyis a person.

One caveat to the person–organization distinctionis evoked by the case of a person who breachesa contract on behalf of his or her employer. Suchaction may be the product of social learning of orga-nizational norms (Trevino and Youngblood 1990), orit may be the manifestation of what the employeeunderstands is characteristic of being loyal andconscientious, with organizational goals in mind(Hamilton and Sanders 1999, Umphress and Bingham2011). Because the perceived reasons for why a par-ticular act was committed markedly influence peo-ple’s reactions to this act (Schweitzer and Gibson2008), they may also affect how the breach of con-tract is judged. Conversely, unlike the motives behindbreaching a contract, the motives behind signing itare irrelevant to the contract’s moral meaning, whichshould in no way be affected by whether it is signedon behalf of oneself or one’s employer. Thus, if theperson–organization discontinuity reflects a differencein the meaning of the contract itself (rather than ofits breach), then judgments of its breach will not besensitive to the principal who benefits from it (in thecase of an employee breaching a contract on behalf ofhis or her employer, the organization), but rather tothe agent who commits it (the employee). Therefore, Ipredicted that (a) contract breach by an organizationwill be judged less as immoral behavior and moreas a reasonable business decision than if the breachwere executed by a person, and (b) judgments of abreach by an organization’s employee will be closerto those of a breach by a person than to those of abreach by an organization. To test these predictions,Experiment 1 included three conditions: breach by anindividual, breach by an organization, and breach byan employee that organization. To prevent possibleeffects of perceived agency, responsibility, or author-ity, the agent in the executive condition was the orga-nization’s chief executive officer (CEO).

2.1.1. Participants and Procedure. One-hundredfifty U.S.-based participants were invited to takea “Contract Perception Survey” for $0.10 each.Responses from two participants who had alreadylogged into the study and from two other participants

who reported in their comments that they did notread the stimuli before responding to the questionswere removed from the analyses (their responses didnot influence the results). The final sample size was146 participants (56% females; mean age, 31.86).

Participants read a description of a contract ada-pted from Wilkinson-Ryan and Baron (2009) betweena homeowner and a home renovator to renovate thehomeowner’s kitchen. Participants also learned thatone week before the scheduled start of the work,the renovator broke the contract to take another,more profitable project. Participants were randomlyassigned to three groups. One group read that theparty who signed and later broke the contract wasan individual home renovation contractor. A secondgroup read that a renovation company’s CEO signedand broke the contract on behalf of the company.A third group read that a renovation company signedand broke the contract.

Participants then rated the extent to which thebreaching party’s behavior was immoral and greedyand the degree to which they thought the breachingparty made a reasonable business decision. They alsorated the extent to which they believed the breachingparty intended to harm the client, and the degree towhich acts such as this one are common in our society.All items were randomly presented, with all measuresrated on nine-point scales ranging from 1 (“stronglydisagree”) to 9 (“strongly agree”).

2.1.2. Results. The two moral judgment items dis-played moderate interitem reliability (alpha = 0071)and were grouped together. A series of one-way anal-yses of variance (ANOVAs) revealed a significanteffect of breacher type on moral judgments of thebreach (F 4211435 = 4055, p = 0001, �2 = 0006) and amarginally significant effect on its perception as a rea-sonable business decision (F 4211435 = 3002, p = 0005,�2 = 0004). Planned comparisons showed that, as pre-dicted, ratings of the levels of immorality and greedreflected in the breach by the company were signifi-cantly lower than those assigned to the breach by aperson (t41435= 3001, p = 00003, d = 0050). In addition,contract breaching by the company received signifi-cantly higher ratings than the same behavior of anindividual as a reasonable business decision (t41435=

2025, p = 0003, d = 0038) (see Figure 1).Tukey’s pairwise comparisons revealed that, as pre-

dicted, moral judgments of a breach by the CEO weresignificantly harsher (mean (M) = 7045, SD = 1052,95% confidence interval (CI) = [6.99, 7.92]) than thoseof a breach by the company (M = 6046, SD = 2018, 95%CI = [5.83, 7.09], p = 0002), and they did not differ sig-nificantly from those of a breach by the independentcontractor (M = 7031, SD = 1046, 95% CI = [6.91, 7.71],p = 0092). The same pattern emerged in evaluations ofthe breach as a reasonable business decision, which

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Figure 1 Mean Judgment Scores of a Breach of Contract as Immoraland Greedy and as a Reasonable Business Decision, byBreaching Party Type in Experiment 1

7.31

4.68

7.45

4.14

6.46

5.35

1

2

3

4

5

6

7

8

9

Immoral, Greedy Reasonable business decision

Contractor

CEO

Company

Note. Error bars indicate ±1 standard error.

were significantly lower for the CEO (M = 4�14, SD =

2�23, 95% CI = [3.43, 4.85]) than for the company (M =

5�35, SD = 2�41, 95% CI = [4.65, 6.04], p = 0�04), butthey did not differ significantly for the independentcontractor (M = 4�68, SD = 2�39, 95% CI = [4.02, 5.34],p= 0�51).

Comparisons between the company and the indi-vidual (i.e., individual person or CEO) conditionsrevealed no significant differences in either perceivedharmful intentions (t�142� = 1�10, p = 0�27) or inperception of the breach as common (t�142� = 1�01,p= 0�32). This suggests that the difference in judg-ments was driven neither by attributing greater inten-tionality to a human agent than to an organization norby being more accustomed to witnessing these acts byorganizations than by individuals.

2.1.3. Discussion. Experiment 1 revealed a person–organization discontinuity when people were askedto evaluate a hypothetical breach of contract situation.A breach by an individual person was regarded ashighly immoral and greedy, regardless of whether theperson was acting independently or on behalf of anemployer. Conversely, breach of the same contract byan organization was assessed as a reasonable businessdecision more so than when the breaching party wasa person. Participants neither reported breaches byorganizations as being more common than breachesby individuals, nor perceived the individual as havinga greater degree of intention in his actions than theorganization. This is consistent with previous findings(e.g., Knobe and Prinz 2008) that show that organi-zations are perceived as having no lesser degree ofagency than individuals.

Interestingly, the independent contractor and thecompany CEO were judged similarly for breaching

the contract. This finding suggests that participantswere not paying attention either to the principalbeneficiary of the breach or to the possible motivesbehind it, which are different in these two cases (i.e.,breaching to increase personal gain or to be a goodemployee). Instead, they focused on the contract itselfand its moral implications.

2.2. Experiment 2: Real ContractsThe following experiment was designed to examinewhether the person–organization discontinuity canemerge from the written contract itself rather thanfrom the guided imagination of a contract scenario.Contracts, like most legal documents, are more com-plex than the descriptions of the contexts in whichthey are written, and, perhaps more importantly, theyare typically phrased in a neutral, formal languagedevoid of any moral or emotional insinuation. Thisformat may decrease the salience of their perceivedmoral dimension and, subsequently, affect people’sreactions to their outcomes. Since cases of breach ofcontract in the real world often involve official docu-ments of this type, it is important to test whether theperson–organization discontinuity holds when read-ing a contract document rather than a summary ofthe events leading up to the breach. Therefore, in thisexperiment, participants read a real contract and pro-vided their judgments of its eventual breach.

Another issue this experiment sought to address isthe potential consequences of the breach. Haidt (2007)argues that one of the important functions of moralintuition is to guide behavior. If a breach of con-tract by an organization elicits different moral reac-tions than does a breach by a person, then this mayaffect subsequent behaviors vis-à-vis the breachingparty, such as taking punitive action, or willingness toengage in future business with it. To examine this pos-sibility, Experiment 2 asked participants about suchimplications.

2.2.1. Participants and Procedure. One-hundredtwenty U.S.-based participants completed a “Con-tract Judgment Survey” online in exchange for $0.25each. Two responses were from participants who hadalready logged into the study and were removed fromthe data set. The final sample included 118 partic-ipants (38% females; mean age, 31.82). Participantswere randomly assigned to two groups. Each groupread a contract for renting a venue for a company’sannual gala event. One group’s contract was signedby the venue and the company, using their corporateseals. The other group’s contract was signed by theowner of the venue and the company’s vice president(VP) (referred to in the contract as the renter). Allidentifying details (e.g., the names and addresses ofthe venue, the company, and the individual signers)were covered in the document itself.

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After reading the contract, participants were toldthat the venue [owner] decided to break the con-tract to take a higher value offer. They then rated theextent to which this behavior was immoral, unethical,and akin to a broken promise, as well as the extentto which it was a reasonable business decision andsomething they would have done had they been inthis position. Two additional items referred to possi-ble implications of the breach to the breaching party.Participants rated their willingness to conduct busi-ness with the breaching party in the future and theirsupport for taking legal action against the breach-ing party, even in the event that an alternative venueis found. All items were rated on a nine-point scaleranging from 1 (“not at all”) to 9 (“very much”) andwere presented in a random order.

2.2.2. Results. An exploratory factor analysis onreactions to the contract breach produced two Promaxrotated factors corresponding to two constructs—moral critique and judgment of the breach as a busi-ness decision. These two factors accounted for 73.99%of the variance and were grouped together into twovariables. The items, factor loadings, and reliabilityscores are presented in Table 1. The two implicationsitems did not correlate significantly with each other(r = 0006, p = 0053), and were analyzed separately.

Independent samples t-tests again revealed aperson–organization discontinuity in judgments ofthe breach. Participants reacted to the breach withsignificantly harsher moral critique when it wasexecuted by the venue’s owner (M = 7073, SD = 1038)than by the venue (M = 6084, SD = 1072) (t41165= 3011,p = 00002, d = 0057). Judgments that saw the breachas a business decision were higher when the breacherwas the venue (M = 3082, SD = 1086) than when it wasthe owner (M = 2089, SD = 2010) (t41165 = 2055, p =

0001, d = 0047). Importantly, participants showed sig-nificantly lower willingness to conduct business withthe venue’s owner after the breach (M = 1078, SD =

1061) than with the venue itself (M = 2051, SD = 1098)(t41165 = 2020, p = 0003, d = 0040). Support for legalaction against the breaching party was higher, onaverage, in the person condition (M = 6092, SD = 1085)than in the organization condition (M = 6041, SD =

1085), but this difference was not significant (t41165=

1049, p = 0014).

2.2.3. Discussion. The results of this experimentprovide further support for the hypothesis that abreach of contract is judged more harshly and is seenless as a business decision when the breaching partyis a person than when it is an organization. In thisexperiment, participants formed their opinions afterreading a contract that was similar to contracts thatare signed in real life. Despite the neutral, legal word-ing used in the contract, the identity of the signer

Table 1 Factor Loadings and Reliability Scores of Components Usedin Experiments 2, 3, 4, 6, and 7

Factor loadings

Factor 1 Factor 2

Experiment 2Moral judgment of the breach (alpha = 0077)

The breaching party’s behavior was immoral 00843The breaching party’s behavior was unethical 00868The breaching party broke a promise made to the 00775

other partyJudgment of the breach as a business decision

(alpha = 0077)The breach was a reasonable business decision 00900I would have acted the same way 00904


How unethical the breaching party’s behavior was 00915How immoral the breaching party’s behavior was 00837How greedy the breaching party’s behavior was 00894

Judgment of the breach as a business decision(alpha = 0077)

The breach was a reasonable business decision 00932I would have acted the same way 00860

Experiment 4Moral considerations (alpha = 0092)

How moral the decision was 00954How ethical the decision was 00962

Business prudence considerations (alpha = 0073)How helpful the decision was for maintaining a 00816

profitable businessHow rational the decision was 00793How prudent the decision was, 00819

from a business point of view


The breaching party’s behavior was unethical 00910The breaching party’s behavior was immoral 00833The breaching party’s behavior was greedy 00756

Judgment of the breach as a business decision(alpha = 0082)

The breach was a reasonable business decision 00904I would have acted the same way 00927


The breaching party’s behavior was immoral 00851The breaching party’s behavior was unethical 00799The breaching party’s behavior was a betrayal 00814

of the other partyJudgment of the breach as a business decision

(alpha = 0069)The breach was a reasonable business decision 00859The breaching party’s behavior was rational 00889

nevertheless influenced participants, attesting to thestrength and robustness of the effect.

Taken together, results of the first two experimentssuggest that people’s reactions to a contract breachby an individual versus by an organization gen-erally vary. Identifying the breaching party as an

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organization decreases the level of moral critique ofthe breach and increases the degree to which peo-ple judge it as a reasonable business decision com-pared to when the breaching party is a person. Thefollowing experiments investigate the cognitive pro-cess behind that discontinuity. I propose that the dis-parity in moral judgments of breach of contract stemsfrom a difference in the degree to which people seethe contract as morally relevant, that is, the strengthof association between the contract and a moral con-cept, such as promise. As previously noted, a contractcan be viewed both as a morally binding promiseand as a morally neutral business instrument. Theseare not distinct categories, and the relative weight ofeach dimension may simply differ between individu-als and organizations. Schweitzer et al. (2006) showedthat promises have a key role in perceived trust viola-tions in organizations, but although making promisesis characteristic of ordinary interpersonal behavior,it is not part of the everyday life of an organiza-tion. Also, as previously mentioned, promises carrya subjective, perceived sense of obligation to fulfillthem. Since organizations are viewed as being devoidof desires, beliefs, or emotions (Manning 1984), thissubjective attribute of a contract may be less rele-vant to them than to individuals. Therefore, organiza-tional contracts may be less strongly associated withpromises than contracts signed by individuals.

The difference between individuals and organiza-tions in terms of the association of their contracts withmoral concepts predicts three patterns of judgment.One is the discontinuity in reactions to a breach ofcontract, which was observed in Experiments 1 and 2.Second, the discontinuity will not be observed inactions that are equally relevant to the moral perspec-tives of both organizations and individuals. Third, thedifference in moral relevance should not only affectnegative reactions to breach of contract, but it shouldalso attenuate positive reactions to an organizationhonoring a contract, relative to a person doing thesame. The following three experiments tested thesepredictions.

2.3. Experiment 3: Breaching a Contract vs.Violating Another Moral Norm

This experiment tested the proposition that whereasa breach of contract elicits a person–organization dis-continuity in judgment, the violation of other moralnorms may generate similar reactions to both organi-zations and to individuals. It examined judgments ofa breach when the contractual obligation was solelya commitment of one side to the other and when theobligation was to follow a consensual moral norm,specifically, to refrain from harming the environment.If people hold similar expectations of ethical behavior

for individuals and for organizations, and the differ-ent meanings of the contracts themselves elicit differ-ent reactions to contract breach, then violation of aconsensual moral norm by an organization or an indi-vidual should elicit a correspondingly similar judg-ment toward either the organization or the individual.

Participants in this experiment read a story aboutthe breach of a contract by either an individual oran organization. In one condition, the contract breachmeant only breaking the business commitment of oneside to the other, whereas in the other condition, thebreach also entailed harming the environment. I pre-dicted that when the violation of the contractual obli-gation is the only transgression, judgments of theindividual’s breach of contract will be harsher thanjudgments of that of the organization, but when thebreacher also harms the environment, its identity willnot affect judgments of the behavior.

2.3.1. Participants and Procedure. One-hundredU.S.-based participants completed a “Contract Sce-nario Survey” for $0.15 each. Four responses fromparticipants who had previously logged into theexperiment were removed from the data set. Thefinal sample consisted of 96 participants (27% females;mean age, 27.72). Participants were randomly as-signed to one of four conditions, in a 2×2 design. Allparticipants read a description of a contract between acleaning supplies company and a cloth manufacturerfor the supply of cotton cloth to be used in a newduster the company plans to make. The contract’sterm was three years. Half of the participants readthat the contract was signed by the company’s owner,and the other half read that the contract was signedby the company itself. Participants also read that afew months after production of the duster began, thecompany [owner] broke the contract to make a dealwith another supplier that offered cheaper material.In one version of the story the cheaper material washarmful to the environment, whereas in the other thiswas not mentioned.

Next, participants rated the extent to which theythought the breaching party’s behavior was immoral,unethical, and greedy and the degree to which theybelieved the breaching party should face legal actionfor this behavior. In addition, they rated the extentto which they thought the breaching party made areasonable business decision and the degree to whichthey believed they would have done the same thinghad they been in the breaching party’s situation. Theorder of presentation of all items was randomizedbetween participants, and all measures were on anine-point scale, similar to Experiments 1 and 2.

2.3.2. Results. Exploratory factor analysis on thejudgment items produced two Promax rotated fac-tors corresponding to two constructs—moral critique

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Figure 2 Mean Judgment Scores of a Breach of Contract as anImmoral Decision by Breaching Party Type and byViolated Moral Norm in Experiment 3

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of the breaching party’s behavior and judgment ofthis behavior as a business decision. These two fac-tors accounted for 80.79% of the variance. The itemswere thus grouped together into two variables repre-senting these factors. The items, factor loadings, andreliability scores are presented in Table 1.

A two-way between-subjects ANOVA revealed asignificant interaction effect between type of signerand type of moral violation on moral judgmentsof the breach of contract (F �1�92� = 5�05, p = 0�03,�2 = 0�05). Simple effects tests showed that whenthere was no violation other than the breaking ofthe contract, participants judged the owner’s behav-ior more harshly than they did that of the company(t�45�= 2�42, p = 0�02, d = 0�72), but when the con-tract breach included environmental harm, reactionsto the company’s behavior were no less critical thanto the owner’s behavior (t < 1) (see Figure 2). Judg-ments of the breach as a business decision displayeda similar pattern: in the no-environmental-harm con-dition, the breach by the company received higherratings (M = 4�48, SD = 1�91) than the breach by theowner (M = 3�24, SD = 1�89) (t�45� = 2�24, p = 0�03,d = 0�67), and there was no difference between themwhen there was environmental harm involved (com-pany, M = 3�23, SD = 2�05; owner, M = 3�12, SD = 1�52)(t < 1), but with no significant interaction betweenagent type and moral norm violation (F �1�92�= 2�24,p = 0�14). The mean level of support for legal actionagainst the company was lower when the breach didnot involve harming the environment (M = 5�38, SD =

2�75) than when environmental harm was involved(M = 6�42, SD = 2�67) or when the breacher was theowner (no environmental harm, M = 6�35, SD = 2�31;environmental harm, M = 6�12, SD = 2�15), but theinteraction between agent type and moral norm vio-lation was nonsignificant (F �1�92�= 1�57, p= 0�21).

2.3.3. Discussion. This experiment demonstratesthat some actions are equally regarded as moral trans-gressions when committed by either individuals ororganizations. Participants judged an environmen-tally harmful action with the same level of moralreproach when the perpetrator was an organizationas when it was an individual person. A person-organization discontinuity was observed only whenbreaking the contract was the only action beingconsidered.

Although we cannot conclude that a contract con-text is unique among all other ethical decision situ-ations, these results do suggest that the differencesin judgment of contracts are not ubiquitous, andthat contracts are different from some moral contexts.One possibility is that in contract situations we havelower expectations about the ethics of the behaviorof organizations than we do for individuals. Alterna-tively, as I argue here, contracting may seem to havegreater relevance to the moral judgments of individu-als than of organizations. Hence, general expectationsmay be that organizations will behave as morally asindividuals, yet honoring a contract may not consti-tute as important a dimension of an organization’s(compared to an individual’s) moral rectitude. Exper-iments 4 and 5 tested this proposition.

2.4. Experiment 4: Judgments ofEthical Contract Behavior

The effects observed thus far can be explained viaboth the different ethical standard and the moralrelevance accounts. The former states that, at leastin the context of contracts, the standard for ethicalbehavior is lower for organizations than for individ-uals, whereas the latter argues that honoring con-tracts is a more important criterion for judging themorality of a person than for judging the moralityof an organization. These two explanations, however,make contradictory predictions about people’s reac-tions to a decision to honor a contract. According tothe different ethical standard account, a person whohonors a contract is merely meeting expectations. Incontrast, an organization that does so is going aboveand beyond expectations, and as such, it should bejudged at least as favorably as, if not more than,the person. The moral relevance account argues thatbecause honoring contracts has a greater influence onour moral evaluations of people than on our judg-ments of organizations, reactions to a person honor-ing a contract will be more positive than those to thesame behavior by an organization. In Experiment 4, Itested participant reactions to the decision to honor abreachable contract.

Another question addressed by this experimentwas whether the type of the other party to thecontract makes a difference in people’s judgments.

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The theoretical arguments outlined in this paper andaddressed in the first two studies focused only on thebreaching side. But judgments may also be affectedby whether the moral norm to honor a contract isstronger when the other party to the contract, who isaffected by the agent’s decision, is an organization oran individual.

2.4.1. Participants and Procedure. One-hundredU.S.-based participants (54% females; mean age,32.68) completed a “Contract Perceptions” survey for$0.10 each. They were randomly assigned to fourgroups in a 2 × 2 design, and they read the samecontract description as was used in Experiment 1but with two differences. One was the variation ofthe second party to the contract, which was either aproperty management firm or a property owner. Theother change was that even after the agent learnedof an opportunity to increase gains by breaking thecontract to take on more profitable work elsewhere,he [it] decided to keep the contract and forgo thisopportunity.

After reading the scenario, participants rated theextent to which they thought the agent’s decisionwas moral, ethical, rational, prudent from a businesspoint of view, and helpful for maintaining a prof-itable business. They also rated the degree to whichthey believed it would be a good idea for all businessentities to behave this way and what they thoughtis the prevalence of this behavior in today’s society.All items were rated on a nine-point scale and werepresented randomly.

2.4.2. Results. An exploratory factor analysis pro-duced two Promax rotated factors, including fiveof the seven items, which corresponded to twodimensions—moral judgment and judgment of busi-ness prudence—and explain 78.08% of the variance.The items, factor loadings, and reliability scores arepresented in Table 1.

A series of 2 × 2 between-subjects AONVAsrevealed a main effect of signer on judgments ofboth the decision’s business prudence (F 411965= 8072,p = 00004, �2 = 0008) and morality (F 411965 = 11000,p = 00001, �2 = 0010). Judgments of the decision tokeep the contract were less favorable, on both dimen-sions, toward the company (business prudence, M =

5035, SD = 1039; morality, M = 6079, SD = 2012) thantoward the person (business prudence, M = 6029,SD = 1076; morality, M = 7096, SD = 1044). In addition,participants viewed this decision as a better idea forall business entities to follow when the agent was aperson (M = 6090, SD = 1093) than when it was thecompany (M = 6002, SD = 1087) (F = 5039, p = 0002,�2 = 0005). Whether the other party to the contractwas a person or an organization did not significantlyaffect any measure and no significant interactions

were observed. Also, similar to prior findings, the sce-narios did not differ in how common they were per-ceived to be in today’s society (F < 1).

2.4.3. Discussion. Experiment 4 demonstratedthat keeping a contract was perceived as more highlymoral and ethical for a person than for a company.This finding is consistent with the moral relevanceexplanation, which suggests that because peopleare more sensitive to the moral side of a contractwhen judging a person versus an organization, theirmoral evaluations of an individual’s decision about acontract will be more extreme than their evaluationsof an organization’s decision, whether this decision’soutcome is positive or negative. In addition, theresults did not reveal any significant effects of thetype of counterpart on participants’ reactions. Hon-oring a contract with an individual was not judgedas any more or less moral or prudent than honoringa contract with an organization.

Together with the findings of the previous experi-ments, these results paint a grim picture of the socialmechanisms that prevent us from breaking contracts.Not only are organizations judged more leniently forbreaking contracts, they receive less credit, both asethical entities and as rational, business sensible ones,when they keep their contracts. If both the social costsfor breaking contracts and the social gains for keep-ing them are lower for organizations than for individ-uals, then we should expect organizations to breachcontracts far more often than individuals. It is there-fore surprising that participants consistently rated theprevalence of contract breaches as being the same forthe two types of agents.

2.5. Experiment 5: An Implicit AssociationBetween Contract and Promise

This experiment sought to examine the root of thedifference in the moral relevance people perceivecontracts to have for organizations and individuals.As discussed earlier in this paper, previous stud-ies found that people sometimes associate contractswith promises. Experiment 5 tested whether peo-ple make this contract–promise association noncon-sciously, and whether their propensity to associatebetween a contract and a promise is affected bythe type of signer. To measure this implicit associa-tion, participants engaged in a word completion taskthat is commonly used in social cognitive researchto measure effects of different stimuli on the cogni-tive accessibility of concepts, such as implicit normsand stereotypes (Kay et al. 2004, Spencer et al. 1998,Tulving and Schacter 1990). The task consists of anumber of word fragments, and for each fragmentthere are several ways it can be completed, one ofwhich forms a word that is relevant to the target con-cept. In this experiment, the stimulus was a contract

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signed either by individuals or by organizations, andthe target concept, for which cognitive accessibilitywas measured, was promise. After reading the con-tract scenario, participants completed a task that con-sisted of a series of word fragments, each of whichcould be completed to form a promise related wordor an irrelevant word. If the concept of promise ismore strongly associated with a contract signed byindividuals than with a contract signed by organiza-tions, then participants who read about the individ-uals’ contract should generate promise related wordsmore readily than those who read about the contractbetween organizations.

2.5.1. Participants and Procedure. Eighty U.S.-based participants were invited to participate in astudy of “Word Completions” for $0.10 each. Fourresponses from participants who had previouslylogged into the study were removed from the data set.One person reported that the stimulus was not pre-sented on his screen before the word completion task,and another correctly guessed the study’s hypothesisby speculating that a manipulation of who signs thecontract should affect the words used to complete theword completion task. These two participants werealso removed from the data set, leaving a final sampleof 74 participants (68% females; mean age, 34.94).

Participants read a contract description similar tothat used in Experiment 1, except that this descrip-tion did not include a breach of the contract, butrather, only details of the parties to the contract andits terms. Therefore, rather than one breaching partyand one victim of the breach, the two contracting par-ties had equal roles. Half of the participants read astory of a contract between two individuals—a prop-erty owner and a home renovation contractor—forrenovating the kitchen of one of the owner’s subur-ban houses. The other half read the same description,except that the signing parties were organizations—a property management firm and a home renovationcompany.

Next, participants were presented with eight wordfragments and were asked to fill in the missing lettersin each fragment to create a word. Unbeknownst toparticipants, each fragment (e.g., T _ _ S T) could becompleted to form a promise related word (TRUST)or irrelevant words (TOAST, TWIST).7 The word frag-ments were presented one at a time and in a different,random order for each participant.

7 In a pilot study, participants generated “as many words as youcan think of that you associate with the concept of promise.” Usingthe website http://www.morewords.com, I created word fragmentsfor 8 of the 10 most frequently generated words that could also becompleted to form words unrelated to a promise.

2.5.2. Results. Participants successfully solved (i.e.,completed to form correctly spelled English words), onaverage, 7.23 (SD = 1011) of the eight word fragments,showing no significant group effect (t4725 = 1021,p = 0023). An independent-samples t-test revealedthat, as predicted, the person group completed signif-icantly more fragments with promise related words(M = 4031, SD = 1045) than did the organization group(M = 3034, SD = 1044) (t4725 = 2087, p = 00005, d =

0068). An alternative analysis that compared the ratioof each participant’s promise related words to suc-cessful word completions (rather than to all eightword fragments) shows a similar difference betweenthe person group (M = 0058, SD = 0017) and the orga-nization group (M = 0047, SD = 0018) (t4725= 2069, p =

00009, d = 0063).

2.5.3. Discussion. The results of Experiment 5show that promise related words were more cog-nitively accessible following the presentation of acontract signed by individuals than one signed byorganizations. This suggests that a contract forms astronger implicit association in people’s minds with apromise when they perceive a person signing it thanwhen they perceive an organization doing so. Thisdifference, then, may account for differences in judg-ments of contract behavior: we may be more lenientin judging a breach of contract by an organizationand give more praise to the honoring of a contractby a person because the meaning of the contract asa promise is more salient for an individual signerthan it is for an organizational one. These results alsoprovide support for the suggestion that the person-organization discontinuity observed in the previousexperiments may reflect a difference in the perceivedrelevance of contracts to moral judgment, and notnecessarily a general laxness of moral standards setfor organizations, relative to the overall moral stan-dards of individuals.

A possible implication of these results is thatstrengthening the association between an organiza-tion’s contract and a promise may shift judgmentsof its breach to more closely resemble those of abreach by a person. The next two experiments testedthe role of the contract–promise association in judg-ments of contract breach and in attenuating theperson–organization discontinuity observed in thesejudgments.

2.6. Experiment 6: Making theContract–Promise Link Explicit

This experiment was designed around the findingthat the implicit association between a contract and apromise is stronger when judging contracts signed byindividuals than those signed by organizations. If thisdifference is responsible for the person–organization

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discontinuity in reactions to a breach, then enhanc-ing the contract–promise association for organizationsmay attenuate the effect. Experiment 6 tested thisprediction by phrasing the description of the con-tractual obligation as a promise. Eigen (2012b) foundthat participants’ propensity to honor the terms of acontract, according to which they agreed to performsome task, increased when they were reminded thatthey made a promise to complete the task. Similarly,here, too, I included the word “promise” in the con-tract’s description and then measured whether par-ticipant reactions to a contract breach were differentthan when the contractual obligation was describedin neutral terms.

2.6.1. A Pilot Study: Does Making a Promise“Humanize” an Organization? Lurie (2004) sug-gested improving ethical conduct in business by mak-ing business more “human” through the increasedsalience of emotions. Similarly, using the verb“promise” in the contractual obligation’s descriptionmight make the organization seem more human, andthus make judgments of its actions closer to those of aperson. To test the possibility that the promise fram-ing might humanize the organization in Experiment 6,I conducted a pilot study. All participants read adescription of a contract, adapted from Lewinsohn-Zamir (2012), between a furniture store and a ban-quet hall, for the supply of a stock of chairs to thebanquet hall at a later date. Participants were ran-domly assigned to four groups in a 2×2 between sub-jects design, with the type of signing agent (the storeor the store manager) and the inclusion of the word“promise” in the phrasing of the contractual obliga-tion as between-subject factors: one group read that“the contract stipulated that the chairs will be sup-plied within 30 days,” whereas the other group readthat “in the contract, the store [manager] promised tosupply the chairs within 30 days.”

Next, participants rated the agent on traits catego-rized by Haslam et al. (2005) as human traits (i.e.,uniquely human or pertaining to human nature, suchas imaginative, sympathetic) and nonhuman traits(e.g., contented, relaxed). A 2 × 2 between-subjectsAONVA reveals a main effect of agent type onhuman trait ratings (F 411335 = 4044, p = 0004, �2 =

0012), but not on nonhuman trait ratings (F < 1),and no phrasing or interaction effects on either mea-sure (F -values < 1). Although the manager was ratedhigher than the store in human traits (manager, M =

4061, SD = 0051; store, M = 4018, SD = 0070), but not innonhuman traits (manager, M = 4078, SD = 0041; store,M = 4061, SD = 0075), including the word “promise”in the contract description did not affect ratings ofthe store or the manager (t-values < 1), ruling outthe increased humanness of the store as a possiblemediator.

2.6.2. Participants and Procedure. Ninety U.S.-based participants (69% females; mean age, 36.34)completed a “Contract Scenario Survey” for $0.10each. They read the same description of the chairsupply contract used in the pilot study, with theaddition that, after receiving a higher value orderfor similar chairs from a hotel, the store decidedto cancel the banquet hall’s order and supply thechairs to the hotel instead. In a 2×2 between-subjectsdesign, the type of breaching party was manipulatedby varying its identity (the store or the store man-ager), while the contract–promise link was manip-ulated by varying the phrasing of the contractualobligation: one group read that “the contract stipu-lated that the chairs will be supplied within 30 days,”whereas the other group read that “in the contract, thestore [manager] promised to supply the chairs within30 days.”

Next, participants rated the extent to which theythought the breaching party’s behavior was immoral,unethical, and greedy, as well as the extent to whichthey thought it was a reasonable business decisionand something they believed they would have donehad they been in the breaching party’s position.In addition, participants rated their support for pay-ment of monetary compensation by the breachingparty to the banquet hall. The order of presentation ofall items was randomized between participants, andall measures were on a nine-point scale.

2.6.3. Results. An exploratory factor analysis pro-duced two Promax rotated factors representing five ofthe six items and corresponding to two constructs—moral judgment and judgment of the breach as a busi-ness decision. These two factors account for 77.47% ofthe variance. The items were grouped into two vari-ables representing the two factors. Table 1 shows theitems, factor loadings and reliability scores.

A series of two-way between-subjects ANOVAsrevealed a significant interaction of breaching partytype and framing of contractual obligations on moraljudgments of the breach (F 411865 = 5088, p = 0002,�2 = 0006) and a marginally significant interactioneffect on judgments of the breach as a business deci-sion (F 411865 = 2095, p = 0009, �2 = 0003). As Fig-ures 3(a) and 3(b) show, when the contractualobligation was framed in neutral terms, a person–organization discontinuity was observed: a breach bythe store manager was judged more harshly than abreach by the store (t4465 = 2087, p = 00006, d = 0085),whereas ratings of the breach as a legitimate busi-ness decision were higher when the breaching partywas the store than when it was the manager (t4465=

3020, p = 00002, d = 0094). In contrast, framing thecontractual obligation as a promise eliminated thediscontinuity: the two cases of the breach, by the storeand by the manager, were judged equivalently, both

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Figure 3 Mean Judgment Scores of a Breach of Contract as anImmoral Decision (a) and as a Business Decision (b) byBreaching Party Type and Framing of the ContractualObligation Type in Experiment 6

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with regard to the moral side and to the business sideof the decision (t-values < 1). Participants also dis-played a stronger preference for enforcing damages inthe manager’s case than in the store’s case when thescenario was phrased neutrally (manager, M = 6�84,SD = 2�72; store, M = 4�39, SD = 2�86) (t�46� = 3�04,p= 0�004, d= 0�90), but not when it included the word“promise” (manager, M = 7�65, SD = 1�69; store, M =

6�82, SD = 2�42) (t�40�= 1�28, p= 0�21).

2.6.4. Discussion. The results of Experiment 6highlight three interesting points about the person–organization discontinuity in judgments of a contractbreach. First, making an explicit association betweenthe contract and a promise eliminated the discontinu-ity and altered the essence of judgments of the con-tract’s breach by the organization to be more similarto those of a breach by a person. This result suggeststhat keeping a promise, like refraining from harm-ing the environment but unlike keeping a contract, isa consensual moral norm, and our moral intuitionsevoke expectations that everyone will obey the norm

and keep the promise (Haidt 2001). Also, as in Exper-iment 3, participants did not see the organization aseither inherently evil or as a completely value neutralactor, but rather, they judged its behavior accordingto some moral standard, which applies equally toorganizations and individuals with regard to keepingpromises. Thus, the difference in perceptions of theneutrally phrased contract may reflect different lev-els of moral awareness or the degree to which thecontract itself was perceived to be relevant to moraljudgment (Butterfield et al. 2000).

Second, the word “promise” did not affect judg-ments of a contract breach by a person. This suggeststhat participants may have already been thinking ofa promise when reading about the store manager’scontractual obligation, and to make the association,they did not need to be reminded that this contractcan be seen as a promise. This finding is consistentwith the results of Experiment 5, which revealed astrong implicit contract-promise link in contracts ofindividuals.

Finally, this experiment shows that the person–organization discontinuity can be remedied, at leastin the context of contracts, by a rather subtle inter-vention. The goal of preventing an executive of anorganization from getting away with breach of con-tract by hiding behind the organization’s identity canbe achieved by inserting the word “promise” into thecontractual obligation.

2.7. Experiment 7: Putting the Contract–PromiseAssociation to Work

The results of Experiment 6 demonstrated that includ-ing the word “promise” in a contract’s descriptionmakes judgments of its breach by an organizationsimilar to those of a breach by an individual. Thisfinding suggests that phrasing the contractual obliga-tion as a promise in the contract itself may help atten-uate the person–organization discontinuity in casethe contract is breached, and it may make judg-ments of the breach more consistent across differ-ent types of agents. In Experiment 7, participantsread a real contract document that was signed eitherby individuals or by organizations, and the obliga-tions it outlined were phrased either neutrally orin a way that included the word “promise.” Par-ticipants then learned of the contract’s subsequentbreach and provided their judgments of this actionand their thoughts about its practical implications.The prediction was that whereas in judgments of thebreach of the neutrally phrased contract a disconti-nuity will appear, including the word “promise” inthe contract’s clauses will eliminate these person–organization differences in judgment.

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2.7.1. Participants and Procedure. One-hundredfifty U.S.-based participants were invited to completea “Contract Judgment Survey” online in exchange for$0.25 each. Four responses from participants who hadalready logged into the study were removed from thedata set. The final sample included 146 participants(44% females; mean age, 29.25), who were randomlyassigned to one of four groups in a 2× 2 design. Eachgroup read a contract for the purchase of an industrialair compressor. The contracts were identical betweengroups, except for the identities of the signers andthe wordings of the contractual obligations. The con-tract’s signers were manipulated between conditions.In one condition, the signers were a dealership anda company, both of whom signed the contract withtheir corporate seals. In the other condition, the con-tract’s signers were the dealership’s sales managerand, referred to in the contract as the buyer, the com-pany’s VP. All identifying details (i.e., the names andaddresses of the dealership, the company, and of theindividual signers) were blacked out in the documentitself. In addition, the wording of the contractual obli-gations was manipulated. For half of the participants,the clauses of the contract were phrased neutrally(e.g., “The dealership [manager] shall deliver thecompressor to the company’s [buyer’s] property”),whereas for the other half, the phrasing includedthe word “promise” (e.g., “The dealership [manager]promises to deliver the compressor to the company’s[buyer’s] property”). An example of the contract usedin the study is in the appendix.

After they read the contract, participants learnedthat after having signed the contract, the dealership[manager] received a higher offer for the compressorfrom another party, broke the contract with the com-pany [buyer], and sold the compressor for the higherprice. Participants then rated the degree to which theybelieved the breaching party’s behavior was unethi-cal, immoral, and a betrayal of the aggrieved party.They also evaluated the degree to which they believedthis behavior was rational, a reasonable business deci-sion, and something they would have done if put in asimilar situation. In addition, participants rated theirwillingness to conduct business with the breachingparty in the future and their support for legal actionagainst the breaching party, regardless of the actualharm caused by the breach (i.e., in the event that theaggrieved party managed to buy an identical com-pressor for the same price somewhere else). All itemswere rated on a nine-point scale and presented in arandom order.

2.7.2. Results. An exploratory factor analysis onjudgments of the contract breach produced twoPromax rotated factors consisting of five of thesix judgment items and corresponding to twoconstructs—moral judgment and judgment of the

breach as a business decision. The items were thusgrouped together to represent the two factors, whichaccount for 71.22% of the variance. The items, fac-tor loadings, and reliability scores are presented inTable 1. The practical implication items did not corre-late significantly with one another and were analyzedseparately.

A two-way between-subjects ANOVA revealed asignificant interaction between signer type and word-ing of the contractual obligation on moral judgmentsof the breach of contract (F �1�142� = 4�89, p = 0�03,�2 = 0�03). Simple effects tests show that when thecontract was worded in neutral terms, moral judg-ments of the breach displayed a person–organizationdiscontinuity, such that a breach by the sales managerwas judged more harshly than was the breach by thedealership (t�72�= 3�48, p= 0�001, d= 0�82). However,when the commitments by the parties were describedin the contract using the word “promise,” judgmentsof the breach did not differ significantly betweenconditions (t < 1) (see Figure 4(a)). Willingness toconduct future business with the breaching party

Figure 4 Mean Moral Judgment Scores of a Breach of Contract (a)and Willingness to Conduct Future Business with theBreaching Party (b) by Breaching Party Type and ContractPhrasing in Experiment 7

7.98 7.77

6.87

7.69

1

2

3

4

5

6

7

8

9

Neutral Promise

(a) Moral critique of the breach

1.852.05

2.85

1.66

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(b) Willingness to conduct future business with the breaching party

ManagerDealership


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showed a similar interaction effect (F 4111425= 6004,p = 0001, �2 = 0004): participants expressed signifi-cantly greater willingness to conduct business withthe dealership than with the manager who breacheda neutrally phrased contract (t4725 = 2018, p = 0003,d = 0051), but this difference was not observed whenthe breached contract was phrased in promise terms(t4725= −1019, p = 0024) (see Figure 4(b)). As for judg-ments of the breach as a business decision, a two-way ANOVA revealed a significant main effect ofthe contract’s signer (F 4111425 = 5051, p = 0002, �2 =

0004), suggesting a person–organization discontinu-ity existed in these judgments, too. Simple effectstests show that the discontinuity occurred when thecontract was phrased in neutral terms (organization,M = 4073, SD = 2013; person, M = 3068, SD = 1091)(t4725 = 2023, p = 0003, d = 0053), but not when theword “promise” was inserted into the contract (orga-nization, M = 4023, SD = 2034; person, M = 3064, SD =

2005) (t4725= 1015, p = 0026). The interaction, however,was not significant (F < 1). No significant effects werefound in terms of participant willingness to sue thebreaching party in case the aggrieved party is notharmed.

2.7.3. Discussion. The results of this experimentshow that, as in Experiment 2, the effects observedin judging a story about the breach of a contract arealso observed in judgments of real contracts. Moreimportantly, the person–organization discontinuity inreactions to a breach of contract can be eliminatedwhen the concept of promise is inserted explicitly intothe contract. While real-world contracts typically donot include any reference to morally charged con-cepts and terms, this experiment’s findings suggestthat phrasing contractual clauses in promise termscan help correct a bias in people’s judgments of thesecontracts. Thus, this experiment offers a simple andsubtle intervention to ensure a fairer and more consis-tent reaction in the event that one of the parties walksaway from a signed deal.

3. General DiscussionThis work addressed two gaps in the literature. First,it tested whether people’s judgments of the actionsof individuals and organizations follow the corpo-rate personhood assumption that these two types ofactors are the same. Second, it tested the effect of typeof contract signing party (e.g., individual versus cor-poration) on moral perceptions of the contract. Priorresearch has shown that people recognize two dimen-sions of contracts: one is formal, explicit, and relatedto the function of a contract as a business instrument,whereas the other, more implicit and subjective, rep-resents the moral function of a contract as a set ofmutual promises made by the signers to each other.

Since research finds that people perceive of organi-zations as being less sensitive than individuals, if atall, to the subjective, emotional features associatedwith the moral side of contracts, I predicted that peo-ple will allot more weight to the moral side of acontractual obligation when signed by a person andmore weight to its business side when signed by anorganization.

The data presented in this paper support thisprediction and suggest that a contract signed bya person is perceived by people to represent apromise made by one signer to the other. The con-tract primes promise related concepts, and when itis breached, the behavior of the breaching party isjudged harshly. Conversely, for an organization, theassociation between the contract and a promise is sig-nificantly weaker and, accordingly, so are the nega-tive reactions toward an organization that breachesthe contract.

This is not to say that organizations are generallyexpected to behave with lower moral standards thanindividuals. For example, the current work shows thatacts such as harming the environment and breakinga promise are judged by the same standards, regard-less of whether the culprit is an individual or anorganization. Rather, it is the strength of the associ-ation between a contract and a promise that drivesthe effect: In Experiment 5, individual signers gen-erated a stronger contract–promise association thanorganizations. In Experiment 6, creating this associ-ation made reactions to a breach by an organiza-tion similar to those to a breach by an individual,whereas in the absence of the contract–promise asso-ciation, a discontinuity in reactions was observed.Together, these studies constitute an experimental-causal-chain design, which demonstrates that theperson–organization discontinuity is mediated by thecontract–promise link (see Spencer et al. 2005).

Identifying the contract–promise association as thecause for the discontinuity suggested a simple andsubtle method to eliminate it. Describing contractualobligations in promise terms in Experiment 6 andincluding the word “promise” in the contract itselfin Experiment 7 made perceptions of the contract’ssubsequent breach similar for organizations and indi-viduals, and it eliminated the person–organizationdiscontinuity observed when a neutrally phrased ver-sion of the contract was used.

The main theoretical contribution of this work isthat it expands the discussion of corporate person-hood from the normative to the descriptive field.Regardless of how the conduct of individuals ver-sus that of organizations should be judged, the lawcurrently assumes that the two types of conduct arejudged identically. The findings of this paper, how-ever, demonstrate that this is not the case, at least

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with regard to contracts. People perceive a contractsigned by an individual differently than they do acontract signed by an organization, even if it is theexact same contract. These findings demonstrate thepotential contribution of research in judgment anddecision making to debates in law and business ethics.

Another contribution in this paper is the shift frommoral judgments of agents’ (i.e., persons, organiza-tions) character to evaluations of actions. The experi-ments reported here show that our moral judgmentsof behavior depend both on the type of agent exer-cising the behavior and on the context. In some con-texts, reactions to a person’s contract decision weremore extreme than those to the same decision madeby an organization; in others, judgments were no dif-ferent for the two agent types. Therefore, we cannotmake conclusions about a general sense of persons’and organizations’ morality without looking at theframing of their decisions and actions.

This paper bridges the gap between research find-ings on the malleability of moral judgments (Ginoet al. 2010, Haidt 2007, Sunstein 2005), perceptionsof personal responsibility and their relation to moraljudgments (Darley and Latane 1968, Higgins et al.1984), and uncertainty and relational issues in con-tracts (Bernstein 1992, 2001; Feldman and Teichman2011). For example, Bernstein’s (1992, 2001) researchhas highlighted the role of relational norms and inter-personal relations in contract negotiation and enforce-ment. One reason for the extensive use of attributes ofinterpersonal interaction may be that the parties rec-ognize their power as moral deterrents against poten-tial breach.

3.1. Limitations and Future DirectionsThis paper’s findings raise a number of interest-ing questions about human behavior in actual con-tract scenarios and whether it is characterized by asimilar discontinuity. Will an executive be less hes-itant to breach a contract signed with a corporateseal, knowing that her actions will be attributed tothe organization? If so, will people reach a contrac-tual agreement with an individual more easily thanwith an organization? Also, does the perception ofcontracts as promises affect people’s preferences forenforcing their completion over accepting monetarycompensation for their breach?

Another intriguing set of questions involves thewider context in which the contract is signed. Howdo different types of agents perceive the relation-ships with their counterparts? Eigen’s (2008) work onform-adhesive contracts (i.e., standard form contractswhose terms are not subject to negotiation, such ascar rental or credit card agreements) demonstratedthat people who viewed these contracts as bindingwere more likely to perceive of their relationship withtheir counterparts as relational, whereas those who

viewed the contracts as nonbinding tended to per-ceive of their relationships with their counterparts astransactional. Indeed, a robust difference in how thecontracts of individuals versus those of organizationsare perceived may imply a difference in the nature ofthe relationships they maintain.

Future research should also address a notable lim-itation of the present work, namely, geographicaland cultural differences. The experiments reportedhere were all conducted in the United States, wherethe law typically does not recognize plaintiffs’ rightsbeyond monetary damages in the amount expectedto be gained had both parties adhered to the con-tract (Farnsworth 1999). In other countries, such asGermany and France, performance enforcement (i.e.,a court order forcing the breaching party to performits contractual obligations) is the norm rather than theexception (Zamir and Medina 2010). This, in additionto cultural differences in moral judgments (Haidt andJoseph 2004), may result in different perceptions ofcontracts in these countries.

4. ConclusionsThis paper reports an empirical test of perceptions ofthe corporate personhood principle in contract con-texts. The results of seven experiments reveal a robustdifference between perceptions of a contract signed byan individual and one signed by an organization, suchthat a contract of the former type carries a moral sig-nificance, similar to that of a promise, which does notexist to the same degree in the latter kind. Althoughthe law does not account for this difference, it haspotentially serious implications for people’s norma-tive standards and moral judgments. In addition, thispaper offers a way to prevent these effects by makinga subtle change in the phrasing of contracts. A contin-ued prescriptive and descriptive discussion, as well asmultidisciplinary research on this topic, can enhanceour understanding of people’s moral judgments andbusiness behavior, and ultimately help to promotecooperation and justice in contract situations.

Supplemental MaterialSupplemental material to this paper is available at http://dx.doi.org/10.1287/mnsc.2013.1745.

AcknowledgmentsThe author is grateful to Daylian Cain, Jin Wook Chang,Taya Cohen, Don Moore, Simone Moran, Ilana Ritov, LilachSagiv, Joachim Vosgerau, and the empirical behavioralresearch group at Hebrew University for their helpful com-ments on earlier versions of this paper. The author thanksEyal Zamir for his support and guidance and NationalPublic Radio’s Planet Money for valuable insight. Thisresearch was supported by the Israel Science Foundation[Grant 100/11].

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Appendix. The Contract Used as Stimulus in the Organization-Promise Condition in Experiment 7

Contract for Purchase of an Air Compressor

This contract for the selling of a portable 150 PSI air compressor is made this day, 4/12/2012, by and

between Equipment Supplies, hereafter referred to as the Dealership,

and Inc., hereafter referred to as the Company.

The Dealership and the Company agree to the following terms and conditions:

1. The Dealership promises to convey full ownership and title to the compressor described below, hereafter referred to as the Compressor:

Year: 1998 Make: Model:

VIN: Engine hours: 7,600

2. The selling price of the compressor is $14,300. A down payment of $2,000 shall be payable uponsigning this contract; the Company promises to pay the balance due upon delivery of the Compressor.

3. The Dealership promises to deliver the Compressor to the Company’s property at Rd.,

Marion, OH, 43302, on 4/23/2012, on which transfer of the ownership and title of the Compressor to the Company shall take place.

4. The Company shall receive the Compressor “as-is,” with no warranties of any kind expressed orimplied. The engine hours registered at the time of transfer shall identically match the number of hours indicated under (1) above.

In witness of their understanding of and agreement to the terms and conditions here in contained, theparties affix their signatures below.

The Dealership The Company

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