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The Roles of Incentives and Voluntary Cooperation for Contractual Compliance

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  • Gächter, Simon

    (University of Nottingham)

  • Kessler, Esther

    (University College London)

  • Königstein, Manfred

    (University of Erfurt)

Abstract

Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts.

Suggested Citation

  • Gächter, Simon & Kessler, Esther & Königstein, Manfred, 2011. "The Roles of Incentives and Voluntary Cooperation for Contractual Compliance," IZA Discussion Papers 5774, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5774
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    3. Asanov, Igor & Vannuccini, Simone, 2020. "Short- and Long-run Effects of External Interventions on Trust," Review of Behavioral Economics, now publishers, vol. 7(2), pages 159-195, May.
    4. Prasad, Kislaya & Salmon, Timothy C., 2013. "Self Selection and market power in risk sharing contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 71-86.
    5. Banuri’s, Sheheryar & de Oliveira, Angela C.M. & Eckel, Catherine C., 2019. "Care provision: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 615-630.

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    More about this item

    Keywords

    principal-agent games; gift-exchange experiments; incomplete contracts; explicit incentives; implicit incentives; repeated games; separability; experiments;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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