Do Incentive Contracts Crowd Out Voluntary Cooperation?

Gächter, Simon and Ernst Fehr
Authors registered in the RePEc Author Service: Simon Gächter

No 3017, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: J41 (search for similar items in EconPapers)
Date: 2001-10
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Citations: View citations in EconPapers (24)

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