Dynamic interaction and the ineffectiveness of incentives

Tom Rauber and Philipp Weinschenk

European Economic Review, 2025, vol. 178, issue C

Abstract: This article studies the effectiveness of financial incentives in a simple model in which a set of rational agents works on a joint project. We show that project success may become less likely and agents can be worse off if they face higher rewards. These success and payoff reversals arise naturally in dynamic interaction. Incentives can thus be ineffective in generating more favorable outcomes even though agents are perfectly rational. Our findings contribute to a better theoretical understanding of the prevailing empirical patterns of project delays and failures.

Keywords: Financial incentives; Dynamic interaction; Discouragement effect; Success reversal; Payoff reversal (search for similar items in EconPapers)
JEL-codes: C73 D82 J30 M52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001448

DOI: 10.1016/j.euroecorev.2025.105094

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