Work motivation , institutions , and performance Simon Gächter and Armin Falk

In this paper we study experimentally four remedies to overcome inefficiencies that arise from the incompleteness of contracts. These remedies are reciprocity, repeated game effects, social embeddedness, and incentive contracts. In our baseline treatment we find that reciprocity is a powerful contract enforcement device. A second experiment establishes that repeated game effects interact with reciprocity in a complementary way, i.e., efficiency is increased compared to our baseline. Adding social approval incentives does not contribute significantly to efficiency. Finally, we show that explicit incentive contracts may have perverse effects in the sense that they “crowd out” reciprocity and therefore reduce efficiency compared to the baseline. In our concluding section we discuss the relation of our findings to the recent literature on “intrinsic motivation”. JEL-Classification: D64, J30, J50, J64, C92 * This paper is part of the EU-TMR Research Network ENDEAR (FMRX-CT98-0238). We gratefully acknowledge financial support from the Swiss National Science Foundation (No. 1214-051000.97) and from the MacArthur Foundation, Network on Economic Environments and the Evolution of Individual Preferences and Social Norms. For helpful comments we are grateful to Werner Güth, Amnon Rapoport and the participants of the First Asian Conference on Experimental Business Research at the Hong Kong University of Science and Technology. + University of St. Gallen, Dufourstrasse 50b, CH-9000 St. Gallen. E-mail: [email protected] ++ University of Zürich, Institute for Empirical Research in Economics, Blümlisalpstrasse 10, CH-8006 Zürich. E-mail: [email protected]