Distrust - The Hidden Cost of Control

Armin Falk and Michael Kosfeld

No 4512, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show experimentally that a principal's distrust in the voluntary performance of an agent has a negative impact on the agent's motivation to perform well. Before the agent chooses his performance, the principal in our experiment decides whether he wants to restrict the agents' choice set by implementing a minimum performance level for the agent. Since both parties have conflicting interests, restriction is optimal for the principal whenever the latter expects the agent to behave opportunistically. We find that most principals in our experiment do not restrict the agent's choice set but trust that the agent will perform well voluntarily. Principals who trust induce, on average, a higher performance and hence earn higher payoffs than principals who control. The reason is that most agents lower their performance as a response to the signal of distrust created by the principal's decision to limit their choice set. Our results shed new light on dysfunctional effects of explicit incentives as well as the puzzling incompleteness of many economic contracts.

Keywords: Trust; Distrust; Motivation; Principal-agent relationship; Incentives; Control; Incomplete contracts (search for similar items in EconPapers)
JEL-codes: C7 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-exp
References: Add references at CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
https://cepr.org/publications/DP4512 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Distrust – The Hidden Cost of Control (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4512

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4512

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().