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Do Incentive Contracts Crowd out Voluntary Cooperation?

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  • Ernst Fehr
  • Simon Gaechter

Abstract

In this paper we provide experimental evidence indicating that incentive contracts may cause a strong crowding out of reciprocity-driven 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.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 034.

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Handle: RePEc:zur:iewwpx:034
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Keywords: Incentive contracts; reciprocity; incomplete contracts; voluntary cooperation; experiments;

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Find related papers by JEL classification:
  • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
  • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
  • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy

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  1. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
  2. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  3. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine.
  4. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
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  7. Armin Falk & Urs Fischbacher, . "A Theory of Reciprocity," IEW - Working Papers 006, Institute for Empirical Research in Economics - University of Zurich.
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  19. repec:dgr:kubcen:199837 is not listed on IDEAS
  20. Iris Bohnet & Bruno S. Frey & Steffen Huck, . "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," IEW - Working Papers 052, Institute for Empirical Research in Economics - University of Zurich.
  21. Fahr, Rene & Irlenbusch, Bernd, 2000. "Fairness as a constraint on trust in reciprocity: earned property rights in a reciprocal exchange experiment," Economics Letters, Elsevier, vol. 66(3), pages 275-282, March.
  22. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
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