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THE HIDDEN COSTS AND RETURNS OF INCENTIVES — TRUST AND TRUSTWORTHINESS AMONG CEOs

Author

Listed:
  • Ernst Fehr

    (University of Zurich & CEPR)

  • John A. List

    (University of Maryland & NBER)

Abstract

We examine experimentally how Chief Executive Officers (CEOs) respond to incentives and how they provide incentives in situations requiring trust and trustworthiness. As a control we compare the behavior of CEOs with the behavior of students. We find that CEOs are considerably more trusting and exhibit more trustworthiness than students—thus reaching substantially higher efficiency levels than students. Moreover, we find that, for CEOs as well as for students, incentives based on explicit threats to penalize shirking backfire by inducing less trustworthy behavior—giving rise to hidden costs of incentives. However, the availability of penalizing incentives also creates hidden returns: if a principal expresses trust by voluntarily refraining from implementing the punishment threat, the agent exhibits significantly more trustworthiness than if the punishment threat is not available. Thus trust seems to reinforce trustworthy behavior. Overall, trustworthiness is highest if the threat to punish is available but not used, while it is lowest if the threat to punish is used. Paradoxically, however, most CEOs and students use the punishment threat, although CEOs use it significantly less.

Suggested Citation

  • Ernst Fehr & John A. List, 2004. "THE HIDDEN COSTS AND RETURNS OF INCENTIVES — TRUST AND TRUSTWORTHINESS AMONG CEOs," Labor and Demography 0409012, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpla:0409012
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    More about this item

    Keywords

    HIDDEN COSTS; RETURNS OF INCENTIVES; TRUST; TRUSTWORTHINESS; CEO;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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