IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v70y2009i1-2p93-105.html
   My bibliography  Save this article

Trust and reciprocity in incentive contracting

Author

Listed:
  • Rigdon, Mary

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 are 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.

Suggested Citation

  • Rigdon, Mary, 2009. "Trust and reciprocity in incentive contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 93-105, May.
    • Handle: RePEc:eee:jeborg:v:70:y:2009:i:1-2:p:93-105
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167-2681(09)00011-0
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
    2. Kenneth Clark & Stephen Kay & Martin Sefton, 2001. "When are Nash equilibria self-enforcing? An experimental analysis," International Journal of Game Theory, Springer;Game Theory Society, vol. 29(4), pages 495-515.
    3. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
    4. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    6. Martin Sefton & Robert Shupp & James M. Walker, 2007. "The Effect Of Rewards And Sanctions In Provision Of Public Goods," Economic Inquiry, Western Economic Association International, vol. 45(4), pages 671-690, October.
    7. Eckel, Catherine C & Grossman, Philip J, 1998. "Are Women Less Selfish Than Men? Evidence from Dictator Experiments," Economic Journal, Royal Economic Society, vol. 108(448), pages 726-735, May.
    8. Cox, James C., 2004. "How to identify trust and reciprocity," Games and Economic Behavior, Elsevier, vol. 46(2), pages 260-281, February.
    9. James Andreoni & Lise Vesterlund, 2001. "Which is the Fair Sex? Gender Differences in Altruism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 293-312.
    10. Eckel, Catherine C. & Grossman, Philip J., 2008. "Differences in the Economic Decisions of Men and Women: Experimental Evidence," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 57, pages 509-519, Elsevier.
    11. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine.
    12. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    13. Ernst Fehr & John A. List, 2004. "The Hidden Costs and Returns of Incentives-Trust and Trustworthiness Among CEOs," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 743-771, September.
    14. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 4.
    15. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 2.
    16. James M. Walker & Matthew A. Halloran, 2004. "Rewards and Sanctions and the Provision of Public Goods in One-Shot Settings," Experimental Economics, Springer;Economic Science Association, vol. 7(3), pages 235-247, October.
    17. Buchner, Susanne & Gonzalez, Luis G. & Guth, Werner & Levati, M. Vittoria, 2004. "Incentive contracts versus trust in three-person ultimatum games: an experimental study," European Journal of Political Economy, Elsevier, vol. 20(3), pages 673-694, September.
    18. McCabe, Kevin & Houser, Daniel & Ryan, Lee & Smith, Vernon & Trouard, Ted, 2001. "A Functional Imaging Study of Cooperation in Two-Person reciprocal Exchange," MPRA Paper 5172, University Library of Munich, Germany.
    19. Edward L. Glaeser & David I. Laibson & José A. Scheinkman & Christine L. Soutter, 2000. "Measuring Trust," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 811-846.
      • Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
    20. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough or Don't Pay at All," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 791-810.
    21. James Andreoni & William Harbaugh & Lise Vesterlund, 2003. "The Carrot or the Stick: Rewards, Punishments, and Cooperation," American Economic Review, American Economic Association, vol. 93(3), pages 893-902, June.
    22. Ernst Fehr & Bettina Rockenbach, 2003. "Detrimental effects of sanctions on human altruism," Nature, Nature, vol. 422(6928), pages 137-140, March.
    23. Nikos Nikiforakis & Hans-Theo Normann, 2008. "A comparative statics analysis of punishment in public-good experiments," Experimental Economics, Springer;Economic Science Association, vol. 11(4), pages 358-369, December.
    24. Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1989. "Communication in the Battle of the Sexes Game: Some Experimental Results," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 568-587, Winter.
    25. Buchan, Nancy R. & Croson, Rachel T.A. & Solnick, Sara, 2008. "Trust and gender: An examination of behavior and beliefs in the Investment Game," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 466-476, December.
    26. Bohnet, Iris & Frey, Bruno S. & Huck, Steffen, 2001. "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," American Political Science Review, Cambridge University Press, vol. 95(1), pages 131-144, March.
    27. Croson, Rachel & Boles, Terry & Murnighan, J. Keith, 2003. "Cheap talk in bargaining experiments: lying and threats in ultimatum games," Journal of Economic Behavior & Organization, Elsevier, vol. 51(2), pages 143-159, June.
    28. Ernst Fehr & Simon Gaechter, "undated". "Do Incentive Contracts Crowd out Voluntary Cooperation?," IEW - Working Papers 034, Institute for Empirical Research in Economics - University of Zurich.
    29. Andreas Ortmann & John Fitzgerald & Carl Boeing, 2000. "Trust, Reciprocity, and Social History: A Re-examination," Experimental Economics, Springer;Economic Science Association, vol. 3(1), pages 81-100, June.
    30. Fehr, Ernst & Kirchler, Erich & Weichbold, Andreas & Gächter, Simon, 1998. "When Social Norms Overpower Competition: Gift Exchange in Experimental Labor Markets," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 324-351, April.
    31. Scharlemann, Jorn P. W. & Eckel, Catherine C. & Kacelnik, Alex & Wilson, Rick K., 2001. "The value of a smile: Game theory with a human face," Journal of Economic Psychology, Elsevier, vol. 22(5), pages 617-640, October.
    32. Ernst Fehr & Urs Fischbacher, 2002. "Why Social Preferences Matter -- The Impact of Non-Selfish Motives on Competition, Cooperation and Incentives," Economic Journal, Royal Economic Society, vol. 112(478), pages 1-33, March.
    33. Duffy, John & Feltovich, Nick, 2002. "Do Actions Speak Louder Than Words? An Experimental Comparison of Observation and Cheap Talk," Games and Economic Behavior, Elsevier, vol. 39(1), pages 1-27, April.
    34. Uri Gneezy, 2003. "The W effect of incentives," Levine's Bibliography 666156000000000315, UCLA Department of Economics.
    35. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
    36. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 6.
    37. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
    38. John A. List, 2006. "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 1-37, February.
    39. Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1992. "Communication in Coordination Games," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 739-771.
    40. Charness, Gary B & Gneezy, Uri, 2007. "Strong Evidence for Gender Differences in Investment," University of California at Santa Barbara, Economics Working Paper Series qt428481s8, Department of Economics, UC Santa Barbara.
    41. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 7.
    42. Bohnet, Iris & Zeckhauser, Richard, 2004. "Trust, risk and betrayal," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 467-484, December.
    43. Crawford, Vincent, 1998. "A Survey of Experiments on Communication via Cheap Talk," Journal of Economic Theory, Elsevier, vol. 78(2), pages 286-298, February.
    44. Ernst Fehr & Urs Fischbacher, "undated". "Why Social Preferences Matter - The Impact of Non-Selfish Motives on Competition," IEW - Working Papers 084, Institute for Empirical Research in Economics - University of Zurich.
    45. Nancy Buchan & Rachel Croson, 1999. "Gender and Culture: International Experimental Evidence from Trust Games," American Economic Review, American Economic Association, vol. 89(2), pages 386-391, May.
    46. Eckel, Catherine C. & Grossman, Philip J., 2008. "Men, Women and Risk Aversion: Experimental Evidence," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 113, pages 1061-1073, Elsevier.
    47. Nikiforakis, Nikos, 2008. "Punishment and counter-punishment in public good games: Can we really govern ourselves," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 91-112, February.
    48. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 1.
    49. Dufwenberg, Martin & Gneezy, Uri, 2000. "Measuring Beliefs in an Experimental Lost Wallet Game," Games and Economic Behavior, Elsevier, vol. 30(2), pages 163-182, February.
    50. Sue Fernie & David Metcalf, 1996. "Its Not What You Pay," CEP Discussion Papers dp0295, Centre for Economic Performance, LSE.
    51. Simon Gachter & Ernst Fehr, 2000. "Cooperation and Punishment in Public Goods Experiments," American Economic Review, American Economic Association, vol. 90(4), pages 980-994, September.
    52. McCabe, Kevin A. & Rigdon, Mary L. & Smith, Vernon L., 2003. "Positive reciprocity and intentions in trust games," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 267-275, October.
    53. Samuel Bowles, 2007. "Social Preferences and Public Economics: Are good laws a substitute for good citizens?," Department of Economics University of Siena 496, Department of Economics, University of Siena.
    54. COOPER, R. & DEJONG, D.V. & FORSYTHE, R. & Tom Ross, 1989. "Communication In The Battle Of The Sexes Game," Carleton Industrial Organization Research Unit (CIORU) 89-03, Carleton University, Department of Economics.
    55. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 3.
    56. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer;Economic Science Association, vol. 9(3), pages 193-208, September.
    57. Avner Ben-Ner & Louis Putterman & Ting Ren, 2007. "Lavish Returns on Cheap Talk: Non-binding Communication in a Trust Experiment," Working Papers 2007-15, Brown University, Department of Economics.
    58. Blume, Andreas & Ortmann, Andreas, 2007. "The effects of costless pre-play communication: Experimental evidence from games with Pareto-ranked equilibria," Journal of Economic Theory, Elsevier, vol. 132(1), pages 274-290, January.
    59. Slonim, Robert & Guillen, Pablo, 2010. "Gender selection discrimination: Evidence from a Trust game," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 385-405, November.
    60. Frey, Bruno S, 1997. "A Constitution for Knaves Crowds Out Civic Virtues," Economic Journal, Royal Economic Society, vol. 107(443), pages 1043-1053, July.
    61. Theodore Groves & Yongmiao Hong & John McMillan & Barry Naughton, 1994. "Autonomy and Incentives in Chinese State Enterprises," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 183-209.
    62. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 8.
    63. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 5.
    64. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    65. Eckel, Catherine C. & Wilson, Rick K., 2004. "Is trust a risky decision?," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 447-465, December.
    66. Ananish Chaudhuri & Lata Gangadharan, 2007. "An Experimental Analysis of Trust and Trustworthiness," Southern Economic Journal, John Wiley & Sons, vol. 73(4), pages 959-985, April.
    67. James Andreoni, 2005. "Trust, Reciprocity, and Contract Enforcement: Experiments on Satisfaction Guaranteed," Levine's Bibliography 666156000000000679, UCLA Department of Economics.
    68. Andreoni,J., 2005. "Trust, reciprocity, and contract enforcement : experiments on satisfaction guaranteed," Working papers 7, Wisconsin Madison - Social Systems.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    2. Calabuig, Vicente & Fatas, Enrique & Olcina, Gonzalo & Rodriguez-Lara, Ismael, 2016. "Carry a big stick, or no stick at all," Journal of Economic Psychology, Elsevier, vol. 57(C), pages 153-171.
    3. Cleave, Blair L. & Nikiforakis, Nikos & Slonim, Robert, 2010. "Is There Selection Bias in Laboratory Experiments?," Working Papers 2010-01, University of Sydney, School of Economics.
    4. Buchan, Nancy R. & Croson, Rachel T.A. & Solnick, Sara, 2008. "Trust and gender: An examination of behavior and beliefs in the Investment Game," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 466-476, December.
    5. Ashraf, Nava & Bohnet, Iris & Piankov, Nikita, 2003. "Is Trust a Bad Investment?," Working Paper Series rwp03-047, Harvard University, John F. Kennedy School of Government.
    6. Giovanni Di Bartolomeo & Stefano Papa, 2019. "The Effects of Physical Activity on Social Interactions: The Case of Trust and Trustworthiness," Journal of Sports Economics, , vol. 20(1), pages 50-71, January.
    7. Blair Cleave & Nikos Nikiforakis & Robert Slonim, 2013. "Is there selection bias in laboratory experiments? The case of social and risk preferences," Experimental Economics, Springer;Economic Science Association, vol. 16(3), pages 372-382, September.
    8. Bejarano, Hernán & Gillet, Joris & Rodriguez-Lara, Ismael, 2021. "Trust and trustworthiness after negative random shocks," Journal of Economic Psychology, Elsevier, vol. 86(C).
    9. Sanjiv Erat & Uri Gneezy, 2012. "White Lies," Management Science, INFORMS, vol. 58(4), pages 723-733, April.
    10. Vicente Calabuig & Enrique Fatas & Gonzalo Olcina & Ismael Rodriguez-Lara, 2013. "Carry a big stick, or no stick at all An experimental analysis of trust and capacity of punishment," Discussion Papers in Economic Behaviour 0413, University of Valencia, ERI-CES.
    11. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    12. Antoni Bosch-Domènech & Joaquim Silvestre, 2017. "The role of frames, numbers and risk in the frequency of cooperation," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 64(3), pages 245-267, September.
    13. James Andreoni, 2018. "Satisfaction Guaranteed: When Moral Hazard Meets Moral Preferences," American Economic Journal: Microeconomics, American Economic Association, vol. 10(4), pages 159-189, November.
    14. William English, 2012. "Demystifying trust: Experimental evidence from Cambodia and Thailand," Journal of Theoretical Politics, , vol. 24(2), pages 172-209, April.
    15. Martijn J. van den Assem & Dennie van Dolder & Richard H. Thaler, 2012. "Split or Steal? Cooperative Behavior When the Stakes Are Large," Management Science, INFORMS, vol. 58(1), pages 2-20, January.
    16. Cassandra R. Chambers & Wayne E. Baker, 2020. "Robust Systems of Cooperation in the Presence of Rankings: How Displaying Prosocial Contributions Can Offset the Disruptive Effects of Performance Rankings," Organization Science, INFORMS, vol. 31(2), pages 287-307, March.
    17. Murnighan, J. Keith & Wang, Long, 2016. "The social world as an experimental game," Organizational Behavior and Human Decision Processes, Elsevier, vol. 136(C), pages 80-94.
    18. Mccannon, Bryan C., 2014. "Trust, reciprocity, and a preference for economic freedom: experimental evidence," Journal of Institutional Economics, Cambridge University Press, vol. 10(3), pages 451-470, September.
    19. Thieme, Lutz & Winkelhake, Olaf & Hartmann, Ulrich, 2014. "Fairness als universelle Norm? Empirische Evidenz ohne Manna [Fairness as a universal norm? Empiric evidence without manna]," Working Papers of the European Institute for Socioeconomics 12, European Institute for Socioeconomics (EIS), Saarbrücken.
    20. Schnellenbach, Jan & Schubert, Christian, 2015. "Behavioral political economy: A survey," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 395-417.

    More about this item

    Keywords

    Trust Reciprocity Incentive contracts Principal-agent Experimental economics;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:70:y:2009:i:1-2:p:93-105. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.