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Incentive Contracts versus Trust in Three-Person Ultimatum Games - An Experimental Study

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Listed:
  • Susanne Büchner
  • Luis Gonzalez
  • Werner Güth
  • M. Vittoria Levati

Abstract

Whether incentive contracts perform better than trust in terms of productive efficiency is usually explored by principal-agent experiments (most involving only one agent). We investigate this issue in the context of a three-person ultimatum experiment, which is simpler and more neutrally framed than traditional principal-agent designs. Contrary to the game theoretic prediction, we find that (mutual) trust is as good as incentive contracts in inducing costly actions by employees. Moreover, we observe an interesting order effect when switching from one regime to the other. This could be important when considering institutional change since (according to our data) early behavioral patterns may be irreversible.

Suggested Citation

  • Susanne Büchner & Luis Gonzalez & Werner Güth & M. Vittoria Levati, "undated". "Incentive Contracts versus Trust in Three-Person Ultimatum Games - An Experimental Study," Papers on Strategic Interaction 2002-20, Max Planck Institute of Economics, Strategic Interaction Group.
    • Handle: RePEc:esi:discus:2002-20
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    Cited by:

    1. Rietz, Thomas A. & Sheremeta, Roman M. & Shields, Timothy W. & Smith, Vernon L., 2013. "Transparency, efficiency and the distribution of economic welfare in pass-through investment trust games," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 257-267.
    2. Roman M. Sheremeta & Jingjing Zhang, 2014. "Three-Player Trust Game With Insider Communication," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 576-591, April.
    3. Gao, Xiang & Long, Cheryl Xiaoning, 2014. "Cultural border, administrative border, and regional economic development: Evidence from Chinese cities," China Economic Review, Elsevier, vol. 31(C), pages 247-264.
    4. Rigdon, Mary, 2009. "Trust and reciprocity in incentive contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 93-105, May.
    5. Andres Reeson & John Tisdell, 2007. "Markets, Motivations And Public Goods: Experimental Investigations On The Impact Of Institutions," Monash Economics Working Papers 22-07, Monash University, Department of Economics.
    6. Reeson, Andrew F. & Tisdell, John G., 2008. "Institutions, motivations and public goods: An experimental test of motivational crowding," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 273-281, October.

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    More about this item

    Keywords

    Ultimatum Game; Incentives; Trust; Fairness; Greasing;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D20 - Microeconomics - - Production and Organizations - - - General

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