The Goldilocks Effect of Ethical Climate: How ‘Just Right’ Levels Drive Service Innovation

Abstract Eliciting employees’ service innovation is crucial for service firms to meet diverse customer needs, foster customer loyalty, and enhance competitiveness. Although ethical climate is often presumed to facilitate service innovation, its influence may not be uniformly positive. Excessive ethical pressure can suppress innovative behavior, suggesting a curvilinear relationship that warrants further investigation. Drawing on social learning theory and behavioral plasticity theory, this study proposed and tested a multilevel model examining the curvilinear effect of ethical climate on service innovation. Two independent studies were conducted using paired data from the Chinese hospitality industry (Study 1) and the Chinese high-tech service industry (Study 2). Results from both studies revealed that ethical climate had a curvilinear (inverted U-shaped) relationship with service innovation. Ethical climate was positively related to ethical efficacy, which in turn exhibited a curvilinear (inverted U-shaped) relationship with service innovation. Ethical efficacy mediated the curvilinear association between ethical climate and service innovation. Additionally, openness moderated the curvilinear relationship between ethical climate and service innovation. Although openness moderated the linear impact of ethical climate on ethical efficacy in Study 1, this moderating effect was not observed in Study 2. Theoretical and practical implications are discussed accordingly.