Many economic relationships involve one party enlisting another to perform an action for a fee. An obvious example is employment relationships between a firm and its workers. Incentive contracts in the workplace make financial reward or punishment dependent on job performance. Economists have developed an extensive set of theories to understand the optimal structure of such contracts.
One concern about the use of such contracts is that they may actually reduce the behavior they are supposed to encourage. Field studies have compared firms that use formal incentive contracts to firms that employ implicit contracts, trusting the workers to cooperate in the firm's best interest. The evidence from these studies suggests that incentive contracts actually inhibit desired cooperative behavior. Other scholars have suggested that implicit relationships encourage a greater sense of trust, which then induces cooperation. Formal incentive contracts reduce trust, and therefore reduce the actual level cooperation even when they reward cooperative behaviors.
This study consists of a series of economic experiments. In each experiment, participants are matched and given the opportunity to cooperate in an investment task. The experimental design varies the contracting environment along two dimensions. The first is the type of contract between the two parties, and the second is whether participants work with each other just once or on a repeated basis. The goal is to observe what contract structure and level of repetition does the most to encourage productive cooperation.
This research is exploratory. The results will be of potential benefit to many audiences. In particular, the results will help managers, employers, and others decide how to encourage cooperation in a variety of employment settings.
