Leadership and Incentives

Abstract

We study how leader compensation affects public goods provision. We report from a lab experiment with four treatments, where the base treatment was a standard public goods game with simultaneous contribution decisions, and the three other treatments allowed participants to volunteer to be the leader in their group and make their contribution before the others. In the three leader treatments, we manipulated the level of compensation given to the leader. Our main finding is that a moderate compensation to the leader is beneficial; it increases the average contribution relative to both a situation where the leader is not compensated and a situation without a leader. A further increase in the leader compensation, however, is detrimental to public goods provision; it attracts more free riders and creates a social crowding-out effect. Finally, we report from a survey showing that the social crowding-out effect is also present in the population at large. We argue that the main findings of the paper are important in many real-life settings where we would like to use economic incentives to encourage people to lead by example. This paper was accepted by Uri Gneezy, behavioral economics.