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Trust and Reciprocity in Incentive Contracting

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Author Info
Mary Rigdon (University of Michigan)

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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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Publisher 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
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Handle: RePEc:wpa:wuwpex:0511007

Note: Type of Document - pdf; pages: 33
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Web page: http://129.3.20.41

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

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Find related papers by JEL classification:
C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gillies, Anthony S & Rigdon, Mary L, 2008. "Epistemic Conditions and Social Preferences in Trust Games," MPRA Paper 9626, University Library of Munich, Germany. [Downloadable!]
  2. Avner Ben-Ner & Louis Putterman, . "Trust, Communication and Contracts: An Experiment," Working Papers 0206, Industrial Relations Center, University of Minnesota (Twin Cities Campus). [Downloadable!]
    Other versions:
  3. Samuel Bowles & Sandra Polanía Reyes, 2009. "Economic Incentives and Social Preferences: A preference-Based Lucas Critique of Public Policy," Working Papers 2009-11, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
    Other versions:
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