Performance Incentives and the Dynamics of Voluntary Cooperation
We investigate how explicit performance incentives in incomplete employment contracts interact with agents’ voluntary cooperation in one-shot and repeated gift-exchange experiments. If contracts are incentive compatible, agents choose their best-reply effort and there is no voluntary cooperation. By contrast, there is substantial voluntary cooperation if the contract is not incentive compatible. Experiencing incentive contracts reduces voluntary cooperation even after incentives are abolished. Incentive contracts have no lasting negative effects on voluntary cooperation if agents experience voluntary cooperation before being exposed to incentive contracts or if there are implicit incentives in repeated interactions. Implicit incentives increase voluntary cooperation strongly and make explicit incentives unnecessary.