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The roles of incentives and voluntary cooperation for contractual compliance

By Simon Gaechter, Esther Kessler and Manfred Koenigstein

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.principal-agent games; gift-exchange experiments; incomplete contracts, explicit incentives; implicit incentives; repeated games; separability; experiments

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