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Trust and reciprocity in incentive contracting

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  • Rigdon, Mary

Abstract

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post punishments or rewards to align incentives. Field data are 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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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 70 (2009)
Issue (Month): 1-2 (May)
Pages: 93-105

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Handle: RePEc:eee:jeborg:v:70:y:2009:i:1-2:p:93-105
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

Keywords: Trust Reciprocity Incentive contracts Principal-agent Experimental economics;

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Find related papers by JEL classification:
  • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
  • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
  • D00 - Microeconomics - - General - - - General

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Cited by:

  1. Patrick Aquino & Robert S. Gazzale & Sarah Jacobson, 2015. "When Do Punishment Institutions Work?," Department of Economics Working Papers 2015-15, Department of Economics, Williams College, revised Aug 2015.
  2. 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).
  3. 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.
  4. Paul Dolan & Matteo M. Galizzi, 2015. "Like ripples on a pond: behavioral spillovers and their implications for research and policy," LSE Research Online Documents on Economics 60804, London School of Economics and Political Science, LSE Library.
  5. 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.
  6. Paul Dolan & Matteo M. Galizzi, 2014. "Because I'm worth it: a lab-field experiment on the spillover effects of incentives in health," LSE Research Online Documents on Economics 60356, London School of Economics and Political Science, LSE Library.
  7. Cassar, Alessandra & Rigdon, Mary, 2011. "Trust and trustworthiness in networked exchange," Games and Economic Behavior, Elsevier, vol. 71(2), pages 282-303, March.
  8. 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.
  9. 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.
  10. Avner Ben-Ner & Louis Putterman, . "Trust, Communication and Contracts: An Experiment," Working Papers 0206, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  11. 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.
  12. Dolan, Paul & Galizzi, Matteo M. & Navarro-Martinez, Daniel, 2015. "Paying people to eat or not to eat? Carryover effects of monetary incentives on eating behaviour," Social Science & Medicine, Elsevier, vol. 133(C), pages 153-158.
  13. Gillies, Anthony S & Rigdon, Mary L, 2008. "Epistemic Conditions and Social Preferences in Trust Games," MPRA Paper 9626, University Library of Munich, Germany.
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