Reciprocity, self-interest and reputation : debt vs equity contracts

Abstract EN

Purpose - The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory experiments.

Design/methodology/approach - The study conducts the following lab experiments bonus-incentive treatment without reputation, bonus-incentive treatment with reputation and trust-incentive treatment with reputation.

Findings - The study finds that the reputation and fairness concerns, in contrast to self-interest, may have a decisive impact on the actual and optimal choices in the reciprocity-based contracts.

The principal pays higher salaries in the bonus contract as compared to an incentive contract.

Originality/value - The study contributes to the behavioral economic literature in the following dimensions.

The existing literature on lab experiments considers a bonus contract as better than the debt contract; however, it does not consider the trust contract better than the debt contract.