Abstract

http://ssrn.com/abstract=229047
 
 

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Do Incentive Contracts Crowd Out Voluntary Cooperation?


Ernst Fehr


University of Zurich - Department of Economics

Simon Gächter


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

February 2001

IEER Working Paper No. 34; and USC CLEO Research Paper No. C01-3

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.

Number of Pages in PDF File: 39

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

JEL Classification: J41, C91, D64

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Date posted: June 22, 2000  

Suggested Citation

Fehr, Ernst and Gächter, Simon, Do Incentive Contracts Crowd Out Voluntary Cooperation? (February 2001). IEER Working Paper No. 34; and USC CLEO Research Paper No. C01-3. Available at SSRN: http://ssrn.com/abstract=229047 or http://dx.doi.org/10.2139/ssrn.229047

Contact Information

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
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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