The Roles of Incentives and Voluntary Cooperation for Contractual Compliance

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

The roles of incentives and voluntary cooperation for contractual compliance

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

Within-Team Competition in the Minimum Effort Coordination Game

We report the results of an experiment on a continuous version of the minimum effort coordination game. The introduction of within-team competition significantly increases effort levels relative to a baseline with no competition and increases coordination relative to a secure treatment where the payoff-dominant equilibrium strategy weakly dominates all other actions. Nonetheless, within-team competition does not prevent subjects to polarize both in the efficient and the inefficient equilibria.Coordination Games, Team Incentives, Minimum Effort Game

Voluntary Teaming and Effort

In a series of experimental games, each of two players may choose between remuneration based on either private or team effort. Although at least one of the players has the subgame perfect equilibrium strategy to choose remuneration based on private effort, we frequently observe team remuneration chosen by both players. Team remuneration allows for high payoff for each player for cooperation, but at the same time provides individual incentives to take a free ride on the other player's effort. Due to significant cooperation we observe that in team remuneration participants make higher profits than in private remuneration. We also observe that, when participants are not given the option of private remuneration, they cooperate significantly less.Team effort, voluntary collaboration, experimental economics

The role of screening and cross-selling in bank-firm relationships

This paper presents a monopolistic competition model of a bank choosing the optimal level of the screening effort in the presence of cross-selling activities. We demonstrate that, in absence of informational synergies, the larger is the range of services that the bank produces, the lower is the optimal screening effort. The paper also analyses the impact of competition in the lending market on cross-selling activities and finds that, for sufficiently low levels of transportation costs, an increase in competition in the lending market increases the expected profitability of services, thus increasing banks’ incentives to engage in cross-selling activities.Policy games, policy effectiveness, controllability, Nash equilibrium existence, rational expectations

Incentive Effects in Asymmetric Tournaments Empirical Evidence from the German Hockey League

Following tournament theory, incentives will be rather low if the contestants of a tournament are heterogeneous. We empirically test this prediction using a large dataset from the German Hockey League. Our results show that indeed the intensity of a game is lower if the teams are more heterogeneous. This effect can be observed for the game as a whole as well as for the ?rst and last third. When dividing the teams in the dataset into favorites and underdogs, we only observe a reduction of effort provision from favorite teams. As the number of games per team changes between different seasons, we can also investigate the effect of a changing spread between winner and loser prize. In line with theory, teams reduce effort if the spread declines. Interestingly, effort is also sensitive to the total number of teams in the league even if the price spread remains unchanged

Does Affirmative Action Reduce Effort Incentives? – A Contest Game Analysis

This paper analyzes the incentive effects of affirmative action in competitive environments modeled as contest games. Competition is between heterogeneous players where heterogeneity might be due to past discrimination. Two policy options are analyzed that tackle the underlying asymmetry: Either it is ignored and the contestants are treated equally, or affirmative action is implemented which compensates discriminated players. It is shown in a simple two-player contest game that a tradeoff between affirmative action and high effort exertion does not exist. Instead, the implementation of affirmative action fosters effort incentives. Similar results hold in the n-player contest as well as under imperfect information if the heterogeneity between contestants is moderate.Asymmetric contest; affirmative action; discrimination

Grading in Games of Status: Marking Exams and Setting Wages

We introduce grading into games of status. Each player chooses effort, producing a stochastic output or score. Utilities depend on the ranking of all the scores. By clustering scores into grades, the ranking is coarsened, and the incentives to work are changed. We first apply games of status to grading exams. Our main conclusion is that if students care primarily about their status (relative rank) in class, they are often best motivated to work not by revealing their exact numerical exam scores (100,99,...,1), but instead by clumping them into coarse categories (A,B,C). When student abilities are disparate, the optimal grading scheme is always coarse. Furthermore, it awards fewer A's than there are alpha-quality students, creating small elites. When students are homogeneous, we characterize optimal grading schemes in terms of the stochastic dominance between student performances (when they shirk or work) on subintervals of scores, showing again why coarse grading may be advantageous. In both the disparate case and the homogeneous case, we prove that absolute grading is better than grading on a curve, provided student scores are independent. We next bring games of money and status to bear on the optimal wage schedule: workers can be motivated not merely by the purchasing power of wages, but also by the status higher wages confer. How should the employer combine both incentive devices to generate an optimal pay schedule? When workers' abilities are disparate, the optimal wage schedule creates different grades than we found with status incentives alone. The very top type should be motivated solely by money, with enormous salaries going to a tiny elite. Furthermore, if the population of workers diminishes as we go up the ability ladder and their disutility for work does not fall as fast, then the optimal wage schedule exhibits increasing wage differentials, despite the linearity in production. When workers are homogeneous, the same status grades are optimal as we found with status incentives alone. A bonus is paid only to scores in the top status grade.Status, Grading, Incentives, Education, Exams, Wages

Grading in Games of Status: Marking Exams and Setting Wages

We introduce grading into games of status. Each player chooses effort, producing a stochastic output or score. Utilities depend on the ranking of all the scores. By clustering scores into grades, the ranking is coarsened, and the incentives to work are changed. We first apply games of status to grading exams. Our main conclusion is that if students care primarily about their status (relative rank) in class, they are often best motivated to work not by revealing their exact numerical exam scores (100,99,...,1), but instead by clumping them into coarse categories (A,B,C). When student abilities are disparate, the optimal grading scheme is always coarse. Furthermore, it awards fewer A's than there are alpha-quality students, creating small elites. When students are homogeneous, we characterize optimal grading schemes in terms of the stochastic dominance between student performances (when they shirk or work) on subintervals of scores, showing again why coarse grading may be advantageous. In both the disparate case and the homogeneous case, we prove that absolute grading is better than grading on a curve, provided student scores are independent. We next bring games of money and status to bear on the optimal wage schedule: workers can be motivated not merely by the purchasing power of wages, but also by the status higher wages confer. How should the employer combine both incentive devices to generate an optimal pay schedule? When workers' abilities are disparate, the optimal wage schedule creates different grades than we found with status incentives alone. The very top type should be motivated solely by money, with enormous salaries going to a tiny elite. Furthermore, if the population of workers diminishes as we go up the ability ladder and their disutility for work does not fall as fast, then the optimal wage schedule exhibits increasing wage differentials, despite the linearity in production. When workers are homogeneous, the same status grades are optimal as we found with status incentives alone. A bonus is paid only to scores in the top status grade.Status, Grading, Incentives, Education, Exams, Wages

Disclosure of research results: the cost of proving your honesty.

In situations where a biased sender provides verifiable information to a receiver, I study how strategic reporting affects the incentives to search for information. Research provides series of signals that can be used selectively in reporting. I show that the sender is strictly worse off when his research effort is not observed by the receiver: he has to conduct more research than in the observable case and in equilibrium, discloses all the information he obtained. However this extra research can be socially beneficial and mandatory disclosure of results can thus be welfare reducing. Finally I identify cases where the sender withholds evidence and for which mandatory disclosure rules become more attractive.persuasion games, search for information, mandatory disclosure, clinical trials;