Dominated Contract in Team Production

Abstract

We experimentally investigate the effect of a dominated contract in team production, which punishes low output but does not reward high output. We consider three systems of implementing the dominated contract: exogenous, voting, and leadership. We find that teams choose the dominated contract in the latter two systems. Moreover, when the dominated contract is implemented, it is equally effective in improving the efforts across the three systems. Finally, we identify the incidence of negative information effect in endogenous institutions: revealing information about others’ contract choices may backfire and harm efficiency.