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Trust and Reciprocity in Incentive Contracting

  • Mary Rigdon

    (University of Michigan)

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post}punishments and rewards to align incentives. Field data is 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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Paper provided by EconWPA in its series Experimental with number 0511007.

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Length: 33 pages
Date of creation: 30 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpex:0511007
Note: Type of Document - pdf; pages: 33
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