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Trust and Reciprocity in Incentive Contracting

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  • Mary Rigdon

    (University of Michigan)

Abstract

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post}punishments and rewards to align incentives. Field data is mixed on whether, and to what extent, such informal incentive contracting (paradoxically) crowds out efficient solutions to the agency problem. This paper explores, via a novel set of laboratory experiments, the impact of ex post incentives on informal contracts between principals and agents in bargaining environments in which there are gains from exchange and when there is an opportunity for the principal to relay a no-cost demand of the division of those gains. Incentive contracting in these environments does not crowd-out off- equilibrium cooperation, and at high incentive levels cooperation is crowded in.

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File URL: http://128.118.178.162/eps/exp/papers/0511/0511007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 0511007.

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Length: 33 pages
Date of creation: 30 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpex:0511007

Note: Type of Document - pdf; pages: 33
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Web page: http://128.118.178.162

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Keywords: incentives; principal-agent; bargaining; trust; cooperation; punishment; reward;

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Citations

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Cited by:
  1. Ben-Ner, Avner & Putterman, Louis, 2009. "Trust, communication and contracts: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 106-121, May.
  2. Kanagaretnam, Kiridaran & Mestelman, Stuart & Khalid Nainar, S.M. & Shehata, Mohamed, 2012. "The impact of empowering investors on trust and trustworthiness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 566-577.
  3. Cassar, Alessandra & Rigdon, Mary, 2011. "Trust and trustworthiness in networked exchange," Games and Economic Behavior, Elsevier, vol. 71(2), pages 282-303, March.
  4. Samuel Bowles & Sandra Polanía Reyes, 2009. "Economic Incentives and Social Preferences: A preference-Based Lucas Critique of Public Policy," UMASS Amherst Economics Working Papers 2009-11, University of Massachusetts Amherst, Department of Economics.
  5. Ben-Ner, Avner & Putterman, Louis & Ren, Ting, 2011. "Lavish returns on cheap talk: Two-way communication in trust games," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(1), pages 1-13, February.
  6. Maria J. Sanchez-Exposito & David Naranjo-Gil, 2012. "Honesty and Management Control System Design: An Experimental Study," Working Papers 12.05, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
  7. Arjan Non, 2011. "Gift-Exchange, Incentives, and Heterogeneous Workers," CESifo Working Paper Series 3547, CESifo Group Munich.
  8. Sääksvuori, Lauri, 2013. "Voluntary formation of centralized sanctioning institutions," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 44(C), pages 150-159.
  9. Gillies, Anthony S & Rigdon, Mary L, 2008. "Epistemic Conditions and Social Preferences in Trust Games," MPRA Paper 9626, University Library of Munich, Germany.
  10. Samuel Bowles & Sandra Polania-Reyes, 2011. "Economic incentives and social preferences: substitutes or complements?," Department of Economics University of Siena 617, Department of Economics, University of Siena.
  11. David Naranjo-Gil & Laura Gomez-Ruiz & Maria Jesus Sanchez-Exposito, 2011. "Neuroscience and management: challenges for behavioural research in organizations," Journal of Positive Management, Uniwersytet Mikolaja Kopernika, vol. 2, pages 45-58.
  12. Samuel Bowles & Sandra Polanía Reyes, 2009. "Economic Incentives and Social Preferences: A Preference-based Lucas Critique of Public Policy," CESifo Working Paper Series 2734, CESifo Group Munich.

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