Do Incentive Contracts Crowd Out Voluntary Cooperation?

41 Pages Posted: 5 Nov 2001  

Ernst Fehr

University of Zurich - Department of Economics

Simon Gächter

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

In this paper we provide experimental evidence indicating that incentive contracts may cause a strong crowding out of 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: C91, D64, J41

Suggested Citation

Fehr, Ernst and Gächter, Simon, Do Incentive Contracts Crowd Out Voluntary Cooperation? (October 2001). CEPR Discussion Paper No. 3017. Available at SSRN: https://ssrn.com/abstract=289680

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

IZA Institute of Labor Economics

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

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