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Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services

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  • Angelova, Vera

    (TU Berlin)

  • Regner, Tobias

    (Friedrich Schiller University Jena)

Abstract

Interactions between players with private information and opposed interests are often prone to bad advice and inefficient outcomes, e.g. markets for financial or health care services. In a deception game we investigate experimentally which factors could improve advice quality. Besides advisor competition and identifiability we add the possibility for clients to make a voluntary payment, a bonus, after observing advice quality. We observe a positive effect on the rate of truthful advice when the bonus creates multiple opportunities to reciprocate, that is, when the bonus is combined with identifiability (leading to several client-advisor interactions over the course of the game) or competition (allowing one advisor to have several clients who may reciprocate within one period).

Suggested Citation

  • Angelova, Vera & Regner, Tobias, 2017. "Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services," Rationality and Competition Discussion Paper Series 26, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:26
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    More about this item

    Keywords

    Asymmetric information; principal-agent; expert services; deception game; sender-receiver game; reciprocity; reputation; experiments; voluntary payment; competition;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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