Do Incentive Contracts Crowd Out Voluntary Cooperation?

Ernst Fehr () and Simon Gächter ()

No 3017, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: experiments; incentive contracts; incomplete contracts; reciprocity; voluntary cooperation (search for similar items in EconPapers)
JEL-codes: J41 (search for similar items in EconPapers)
Date: 2001-10
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