Working Paper: CEPR ID: DP4512
Authors: Armin Falk; Michael Kosfeld
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: control; distrust; incentives; incomplete contracts; motivation; principal-agent relationship; trust
JEL Codes: C7; C9; M5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Principal's decision to control (D70) | Agent's motivation to perform well (L85) |
| Principal's decision to control (D70) | Agent's performance (L85) |
| Principal's trust in agent (D82) | Agent's performance (L85) |
| Agent's performance (L85) | Principal's payoffs (C72) |
| Principal's pessimistic beliefs about agent performance (D80) | Principal's decision to control (D70) |
| Principal's decision to control (D70) | Agent's control-averse behavior (D82) |
| Agent's control-averse behavior (D82) | Agent's performance (L85) |