The role of incentives in dynamic favour exchange: An experimental investigation

We study the role of direct and indirect incentives, as well as accounting/feedback systems, in a system of dynamic favour exchange. Subjects are placed in small groups and each period are further matched in subgroups of two where one player (the sender) exerts costly effort, which generates a benefit for his/her match (the receiver). That is, she does a favour. Senders exert substantial costly effort on behalf of receivers, even when no direct incentives are in place. However we show that when direct monetary incentives are in place (receivers pay senders for their effort in points, and points are converted to money at the end of the experiment), it leads to higher average efficiency and less variability of behavior. In the absence of direct incentives, with or without a public accounting system, group behavior is markedly different between those groups that score highly on the social value orientation (SVO) and those that do not. High SVO groups are able to meet or exceed the efficiency level achieved under direct incentives. When direct incentives are present, there is no difference between high and low SVO groups; instead play converges to the subgame perfect Nash equilibrium based on selfish preferences.