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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Do Incentive Contracts Undermine Voluntary Cooperation?
Organization Unit
Authors
  • Ernst Fehr
  • Simon Gächter
Language
  • English
Institution University of Zurich
Series Name Working paper series / Institute for Empirical Research in Economics
Number No. 34
ISSN 1424-0459
Date 2002
Abstract Text In this paper we provide experimental evidence indicating that incentive contracts may undermine voluntary cooperation. This suggests that explicit incentives may have costly side effects that have been largely neglected by economists. In our experiments the undermining effect is so strong that the incentive contracts are less efficient than contracts without any incentives. Buyers, who are in the role of principals, nonetheless, prefer the incentive contracts because they allow them tonappropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them. The undermining of voluntary cooperation through incentives is, in principle, consistent with models of inequity aversion and reciprocity. Additional experiments show, however, that the reduction of voluntary cooperation throughnincentives is partly due to a framing effect.
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