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Reciprocity, self-interest and reputation: debt vs equity contracts

Author

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  • Syed Munawar Shah
  • Mariani Abdul-Majid

Abstract

Purpose - The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory experiments. Design/methodology/approach - The study conducts the following lab experiments bonus–incentive treatment without reputation, bonus–incentive treatment with reputation and trust–incentive treatment with reputation. Findings - The study finds that the reputation and fairness concerns, in contrast to self-interest, may have a decisive impact on the actual and optimal choices in the reciprocity-based contracts. The principal pays higher salaries in the bonus contract as compared to an incentive contract. Originality/value - The study contributes to the behavioral economic literature in the following dimensions. The existing literature on lab experiments considers a bonus contract as better than the debt contract; however, it does not consider the trust contract better than the debt contract.

Suggested Citation

  • Syed Munawar Shah & Mariani Abdul-Majid, 2019. "Reciprocity, self-interest and reputation: debt vs equity contracts," Islamic Economic Studies, Emerald Group Publishing Limited, vol. 27(1), pages 53-64, August.
    • Handle: RePEc:eme:iespps:ies-05-2019-0004
    DOI: 10.1108/IES-05-2019-0004
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    References listed on IDEAS

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    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    3. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    4. Armin Falk & James J. Heckman, 2009. "Lab Experiments are a Major Source of Knowledge in the Social Sciences," Working Papers 200935, Geary Institute, University College Dublin.
    5. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    6. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    7. Fong, Christina, 2001. "Social preferences, self-interest, and the demand for redistribution," Journal of Public Economics, Elsevier, vol. 82(2), pages 225-246, November.
    8. Ben-Ner, Avner & Putterman, Louis & Kong, Fanmin & Magan, Dan, 2004. "Reciprocity in a two-part dictator game," Journal of Economic Behavior & Organization, Elsevier, vol. 53(3), pages 333-352, March.
    9. Armin Falk & Stephan Meier & Christian Zehnder, 2013. "Do Lab Experiments Misrepresent Social Preferences? The Case Of Self-Selected Student Samples," Journal of the European Economic Association, European Economic Association, vol. 11(4), pages 839-852, August.
    10. Samuel Bowles & Herbert Gintis, 2000. "Reciprocity, Self-Interest and the Welfare State," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 26, pages 33-53.
    11. Mohammad Umer Chapra, 2009. "The Global Financial Crisis: Can Islamic Finance Help? الأزمة المالية العالمية: هل يساعد التمويل الإسلامي؟," Chapters of books published by the Islamic Economics Institute, KAAU or its faculty members., in: Islamic Economics Institute (ed.),Issues in the International Financial Crisis from an Islamic Perspective-05 قضايا في الأزمة المالية العالمية من منظور إسلامي, edition 1, chapter 2, pages 11-18, King Abdulaziz University, Islamic Economics Institute..
    12. Siddiqi, Mohammad Nejatullah, 2006. "Islamic Banking And Finance In Theory And Practice: A Survey Of State Of The Art," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 2-48.
    13. Sumner H. Slichter, 1929. "The Current Labor Policies of American Industries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 43(3), pages 393-435.
    14. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Self-Interest; Reciprocity; Reputation; Debt contract; Equity contract; B52; C72; K5; I8; O2; O6;
    All these keywords.

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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