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The roles of incentives and voluntary cooperation for contractual compliance

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  • Simon Gaechter

    (University of Nottingham)

  • Esther Kessler

    (University College London)

  • Manfred Koenigstein

    (Universitaet 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

  • Simon Gaechter & Esther Kessler & Manfred Koenigstein, 2011. "The roles of incentives and voluntary cooperation for contractual compliance," Discussion Papers 2011-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    • Handle: RePEc:not:notcdx:2011-06
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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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