Trust and reciprocity in incentive contracting

Research output: Contribution to journalArticlepeer-review

40 Scopus citations

Abstract

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post punishments or rewards to align incentives. Field data are mixed on whether, and to what extent, such informal incentive contracting (paradoxically) crowds out efficient solutions to the agency problem. This paper explores, via a novel set of laboratory experiments, the impact of ex post incentives on informal contracts between principals and agents in bargaining environments in which there are gains from exchange and when there is an opportunity for the principal to relay a no-cost demand of the division of those gains. Incentive contracting in these environments does not crowd-out off-equilibrium cooperation, and at high incentive levels cooperation is crowded in.

Original languageEnglish (US)
Pages (from-to)93-105
Number of pages13
JournalJournal of Economic Behavior and Organization
Volume70
Issue number1-2
DOIs
StatePublished - May 2009
Externally publishedYes

Keywords

  • Experimental economics
  • Incentive contracts
  • Principal-agent
  • Reciprocity
  • Trust

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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