Incentives crowd out voluntary cooperation: evidence from gift-exchange experiments

Abstract

Explicit and implicit incentives and opportunities for mutually beneficial voluntary cooperation coexist in many economic relationships. In a series of eight laboratory gift-exchange experiments, we show that incentives can lead to crowding out of voluntary cooperation even after they have been abolished. This crowding-out also occurs in repeated relationships, which otherwise strongly increase effort compared to one-shot interactions. Using a unified econometric framework, we unpack these results as a function of positive and negative reciprocity, as well as the principals’ wage offer and the incentive compatibility of the contract. Crowding-out occurs mostly due to reduced wages and not a change in reciprocal wage–effort relationships. Our systematic analysis also replicates established results on gift exchange, incentives, and crowding out of voluntary cooperation while being exposed to incentives. Overall, our findings show that the behavioral consequences of explicit incentives strongly depend on the features of the situation in which they are embedded.