DP3017 Do Incentive Contracts Crowd Out Voluntary Cooperation?
|Author(s):||Ernst Fehr, Simon Gächter|
|Publication Date:||October 2001|
|Keyword(s):||experiments, incentive contracts, incomplete contracts, reciprocity, voluntary cooperation|
|Programme Areas:||Industrial Organization, Labour Economics|
|Link to this Page:||http://www.cepr.org/pubs/dps/DP3017|
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.