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Distrust - The Hidden Cost of Control

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Author Info
Falk, Armin
Kosfeld, Michael

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4512.

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Date of creation: Aug 2004
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Handle: RePEc:cpr:ceprdp:4512

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Related research
Keywords: control; distrust; incentives; incomplete contracts; motivation; principal-agent relationship; trust;

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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Clara Graziano & Annalisa Luporini, 2005. "Ownership Concentration, Monitoring and Optimal Board Structure," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Lars P. Feld & Bruno S. Frey & Benno Torgler, 2006. "Rewarding Honest Taxpayers? Evidence on the Impact of Rewards from Field Experiments," CREMA Working Paper Series 2006-16, Center for Research in Economics, Management and the Arts (CREMA). [Downloadable!]
  3. Christian Grund & Niels Westergaard-Nielsen, 2005. "The Dispersion of Employees' Wage Increases and Firm Performance," Bonn Econ Discussion Papers bgse3_2005, University of Bonn, Germany. [Downloadable!]
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  4. Francis Kamarz (editor) & Joshua D. Angrist & David M. Blau & Armin Falk & Jean-Marc Robin & Christopher R. Taber, 2006. "How to do empirical economics," Investigaciones Economicas, Fundación SEPI, vol. 30(2), pages 179-206, May. [Downloadable!]
  5. Stéphane Hallegatte, 2005. "Accounting for Extreme Events in the Economic Assessment of Climate Change," Working Papers 2005.1, Fondazione Eni Enrico Mattei. [Downloadable!]
  6. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran, 2008. "Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6068, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  7. Roland Bénabou & Jean Tirole, 2005. "Incentives and Prosocial Behavior," IZA Discussion Papers 1695, Institute for the Study of Labor (IZA). [Downloadable!]
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  8. Roberto Galbiati & Pietro Vertova, 2006. "The Hidden Effect of Rules: Behavioural consequences of Obligations," Discussion Papers 18_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy. [Downloadable!]
  9. Dirk Sliwka, 2006. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," IZA Discussion Papers 2293, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. Bernd Irlenbusch & Dirk Sliwka, 2005. "Incentives, Decision Frames, and Motivation Crowding Out - An Experimental Investigation," IZA Discussion Papers 1758, Institute for the Study of Labor (IZA). [Downloadable!]
  11. Matteo Ploner, 2007. "Personal Autonomy in Trust-Based Interactions. An Experimental Analysis," CEEL Working Papers 0701, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
  12. Alexander S. Kritikos & Jonathan H. W. Tan, 2008. "Indenture as a Self-Enforced Contract Device: An Experimental Test," Working Papers 002, Hanseatic University, Germany, Department of Economics. [Downloadable!]
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  13. Pedro Rey Biel, 2005. "Equilibrium Play and Best Response in Sequential Constant Sum Games," Experimental 0506004, EconWPA. [Downloadable!]
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