Working Paper: CEPR ID: DP3017
Authors: Ernst Fehr; Simon Gächter
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
JEL Codes: C91; D64; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal Contracts (D86) | Consider Efficiency Costs of Crowding Out (D61) |
| Incentive Contracts (D86) | Crowding Out of Voluntary Cooperation (D70) |
| Crowding Out of Voluntary Cooperation (D70) | Less Efficient Outcomes (D61) |
| Incentive Treatment (IT) (J33) | Less Effort than Trust Treatment (TT) (C22) |
| Material Incentives (M52) | Reduction in Voluntary Cooperation (D70) |
| Incentive Contracts (D86) | Less Efficient Outcomes (D61) |