The Roles of Incentives and Voluntary Cooperation for Contractual Compliance

46 Pages Posted: 20 Jun 2011

See all articles by Simon Gaechter

Simon Gaechter

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

Esther Kessler

Independent

Manfred Königstein

University of Erfurt

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

Suggested Citation

Gachter, Simon and Kessler, Esther and Königstein, Manfred, The Roles of Incentives and Voluntary Cooperation for Contractual Compliance. IZA Discussion Paper No. 5774. Available at SSRN: https://ssrn.com/abstract=1867043

Simon Gachter (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

IZA Institute of Labor Economics

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

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Esther Kessler

Independent ( email )

No Address Available

Manfred Königstein

University of Erfurt ( email )

Internationales Buro
Nordhaeuser Str. 63
D - 99089 Erfurt
Germany

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