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The Roles of Incentives and Voluntary Cooperation for Contractual Compliance

  • Gächter, Simon

    ()

    (University of Nottingham)

  • Kessler, Esther

    ()

    (University College London)

  • Königstein, Manfred

    ()

    (University of Erfurt)

Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5774.

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Length: 46 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5774
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