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Do Incentive Contracts Crowd Out Voluntary Cooperation?

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  • Fehr, Ernst
  • Gächter, Simon

Abstract

In this Paper we provide experimental evidence indicating that incentive contracts may cause a strong crowding out of voluntary cooperation. This crowding-out effect constitutes costs of incentive provision that have been largely neglected by economists. In our experiments the crowding-out effect is so strong that the incentive contracts are less efficient than contracts without any incentives. Principals, nonetheless, prefer the incentive contracts because they allow them to appropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them.

Suggested Citation

  • Fehr, Ernst & Gächter, Simon, 2001. "Do Incentive Contracts Crowd Out Voluntary Cooperation?," CEPR Discussion Papers 3017, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3017
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    More about this item

    Keywords

    experiments; incentive contracts; incomplete contracts; reciprocity; voluntary cooperation;
    All these keywords.

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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