Discussion paper

DP3017 Do Incentive Contracts Crowd Out Voluntary Cooperation?

In this Paper we provide experimental evidence indicating that incentive contracts may cause a strong crowding out of voluntary cooperation. This crowding-out effect constitutes costs of incentive provision that have been largely neglected by economists. In our experiments the crowding-out effect is so strong that the incentive contracts are less efficient than contracts without any incentives. Principals, nonetheless, prefer the incentive contracts because they allow them to appropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them.

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Citation

Gächter, S and E Fehr (2001), ‘DP3017 Do Incentive Contracts Crowd Out Voluntary Cooperation?‘, CEPR Discussion Paper No. 3017. CEPR Press, Paris & London. https://cepr.org/publications/dp3017