Do Incentive Contracts Crowd Out Voluntary Cooperation?
University of Zurich - Department of Economics
CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics
IEER Working Paper No. 34; and USC CLEO Research Paper No. C01-3
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
Date posted: June 22, 2000