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Reciprocity, self-interest and reputation: debt vs equity contracts

Author

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  • Syed Munawar Shah
  • Mariani Abdul-Majid

Abstract

Purpose - The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory experiments. Design/methodology/approach - The study conducts the following lab experiments bonus–incentive treatment without reputation, bonus–incentive treatment with reputation and trust–incentive treatment with reputation. Findings - The study finds that the reputation and fairness concerns, in contrast to self-interest, may have a decisive impact on the actual and optimal choices in the reciprocity-based contracts. The principal pays higher salaries in the bonus contract as compared to an incentive contract. Originality/value - The study contributes to the behavioral economic literature in the following dimensions. The existing literature on lab experiments considers a bonus contract as better than the debt contract; however, it does not consider the trust contract better than the debt contract.

Suggested Citation

  • Syed Munawar Shah & Mariani Abdul-Majid, 2019. "Reciprocity, self-interest and reputation: debt vs equity contracts," Islamic Economic Studies, Emerald Group Publishing Limited, vol. 27(1), pages 53-64, August.
    • Handle: RePEc:eme:iespps:ies-05-2019-0004
    DOI: 10.1108/IES-05-2019-0004
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    References listed on IDEAS

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    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    3. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    4. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    5. Armin Falk & James J. Heckman, 2009. "Lab Experiments are a Major Source of Knowledge in the Social Sciences," Working Papers 200935, Geary Institute, University College Dublin.
    6. Fong, Christina, 2001. "Social preferences, self-interest, and the demand for redistribution," Journal of Public Economics, Elsevier, vol. 82(2), pages 225-246, November.
    7. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    8. Ben-Ner, Avner & Putterman, Louis & Kong, Fanmin & Magan, Dan, 2004. "Reciprocity in a two-part dictator game," Journal of Economic Behavior & Organization, Elsevier, vol. 53(3), pages 333-352, March.
    9. Armin Falk & Stephan Meier & Christian Zehnder, 2013. "Do Lab Experiments Misrepresent Social Preferences? The Case Of Self-Selected Student Samples," Journal of the European Economic Association, European Economic Association, vol. 11(4), pages 839-852, August.
    10. Samuel Bowles & Herbert Gintis, 2000. "Reciprocity, Self-Interest and the Welfare State," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 26, pages 33-53.
    11. Mohammad Umer Chapra, 2009. "The Global Financial Crisis: Can Islamic Finance Help? الأزمة المالية العالمية: هل يساعد التمويل الإسلامي؟," Chapters of books published by the Islamic Economics Institute, KAAU or its faculty members., in: Islamic Economics Institute (ed.),Issues in the International Financial Crisis from an Islamic Perspective-05 قضايا في الأزمة المالية العالمية من منظور إسلامي, edition 1, chapter 2, pages 11-18, King Abdulaziz University, Islamic Economics Institute..
    12. Siddiqi, Mohammad Nejatullah, 2006. "Islamic Banking And Finance In Theory And Practice: A Survey Of State Of The Art," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 2-48.
    13. Sumner H. Slichter, 1929. "The Current Labor Policies of American Industries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 43(3), pages 393-435.
    14. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Self-Interest; Reciprocity; Reputation; Debt contract; Equity contract; B52; C72; K5; I8; O2; O6;
    All these keywords.

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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