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The roles of incentives and voluntary cooperation for contractual compliance

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  • Simon Gaechter

    ()
    (University of Nottingham)

  • Esther Kessler

    ()
    (University College London)

  • Manfred Koenigstein

    ()
    (Universitaet Erfurt)

Abstract

Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts.

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Bibliographic Info

Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2011-06.

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Date of creation: Jun 2011
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Handle: RePEc:cdx:dpaper:2011-06

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Keywords: principal-agent games; gift-exchange experiments; incomplete contracts; explicit incentives; implicit incentives; repeated games; separability; experiments;

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Cited by:
  1. Prasad, Kislaya & Salmon, Timothy C., 2013. "Self Selection and market power in risk sharing contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 71-86.
  2. Schnedler, Wendelin & Vanberg, Christoph, 2014. "Playing ‘hard to get’: An economic rationale for crowding out of intrinsically motivated behavior," European Economic Review, Elsevier, vol. 68(C), pages 106-115.

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