39 Pages Posted: 22 Jun 2000
Date Written: February 2001
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: 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: https://ssrn.com/abstract=229047 or http://dx.doi.org/10.2139/ssrn.229047