Trust and reciprocity in incentive contracting

Abstract

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post punishments or rewards to align incentives. Field data is mixed on whether, and to what extent, such informal incentive contracting (paradoxically) crowds out efficient solutions to the agency problem. This paper explores, via a novel set of laboratory experiments, the impact of ex post incentives on informal contracts between principals and agents in bargaining environments in which there are gains from exchange and when there is an opportunity for the principal to relay a no-cost demand of the division of those gains. Incentive contracting in these environments does not crowd-out off-equilibrium cooperation, and at high incentive levels cooperation is crowded in.

Like ripples on a pond: Behavioral spillovers and their implications for research and policy

“…Analogously, the economic and psychology literature on financial incentives has since long highlighted the 'hidden costs' of incentives (Fehr & List, 2004), including crowding out of intrinsic motivation (Deci, Koestner, & Ryan, 1999;Frey & Oberholzer-Gee, 1997); changing social norms or individual beliefs about social norms (Gneezy & Rustichini, 2000a, 2000bHeyman & Ariely, 2004); interacting in unpredictable ways with reciprocity, reputation, and social comparison concerns (Ariely, Bracha, & Meier, 2009;Dur, Non, & Roelfsema, 2010;Fehr & Gachter, 1997;Gachter & Thoni, 2010;Greiner, Ockenfels, & Werner, 2011;Rigdon, 2009); and 'choking' due to the anxiety aroused by relating payment to performance (Ariely, Gneezy, Loewenstein, & Mazar, 2009). In such cases, incentives may 'backfire', in that they result in the opposite effects to the ones originally envisaged (Bénabou & Tirole, 2003, 2006Fehr & Falk, 2002;Kamenica, 2012).…”

Trust, communication and contracts: An experiment

“…Buchan et al (2006) allowed subjects to engage in communication before playing trust games, but theirs was a manipulation of social distance prior to informing subjects of their decision task, so there was no taskrelevant communication. Fehr and Rockenbach (2003), Houser et al (2005) and Rigdon (2005) conducted games in which trustors could suggest amounts to be returned by their trustee counterparts and in some conditions threaten punishment should they not do so. Rigdon's subjects could reject or accept proposals.…”

Norms, Conformity, and Controls

“…Because people tend to repay trust with trust, this results in higher levels of trust in later periods. Rigdon [2009] also finds evidence of “crowding in” when those who are being subjected to the control system recognize its utility (and therefore do not feel unduly mistrusted).…”