Can a bonus overcome moral hazard? An experiment on voluntary payments, competition, and reputation in markets for expert services

Vera Angelova and Tobias Regner

No 2016-027, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Interactions between players with private information and opposed interests are often prone to bad advice and inefficient outcomes, e.g. markets for financial or health care services. In a deception game we investigate experimentally which factors could improve advice quality. Besides advisor competition and identifiability we add the possibility for clients to make a voluntary payment, a bonus, after observing advice quality. We observe a positive effect on the rate of truthful advice when the bonus creates multiple opportunities to reciprocate, that is, when the bonus is combined with identifiabilitiy (leading to several client-advisor interactions over the course of the game) or competition (allowing one advisor to have several clients who may reciprocate within one period). Moreover, identifiability significantly increases truth-telling under competition.

Keywords: asymmetric information; principal-agent; expert services; deception; sender-receiver game; reciprocity; reputation; experiments; voluntary payment; competition (search for similar items in EconPapers)
JEL-codes: C91 D03 D82 G20 I11 (search for similar items in EconPapers)
Date: 2016
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https://www.econstor.eu/bitstream/10419/148863/1/867096403.pdf (application/pdf)

Related works:
Working Paper: Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services (2017)
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