Do Incentives Destroy Voluntary Cooperation?

We investigate experimentally 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 bestreply 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. We then examine the robustness of these findings with regard to two variables: Experience with voluntary cooperation and the possibility of implicit incentives in repeated interactions. We find that 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 or even counterproductive.