The Roles of Incentives and Voluntary Cooperation for Contractual Compliance

Abstract

Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts.

Keywords: principal-agent games, gift-exchange experiments, incomplete contracts, explicit incentives, implicit incentives, repeated games, separability, experiments

JEL Classification: C70, C90