Do Incentive Contracts Crowd Out Voluntary Cooperation?

39 Pages Posted: 22 Jun 2000

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Simon Gächter

CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001

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.

Keywords: Incentive contracts, reciprocity, incomplete contracts, voluntary cooperation, experiments

JEL Classification: J41, C91, D64

Suggested Citation

Fehr, Ernst and Gächter, Simon, Do Incentive Contracts Crowd Out Voluntary Cooperation? (February 2001). Available at SSRN: https://ssrn.com/abstract=229047 or http://dx.doi.org/10.2139/ssrn.229047

Ernst Fehr (Contact Author)

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Simon Gächter

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,976
Abstract Views
15,034
Rank
14,526
PlumX Metrics