Abstract
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.
Highlights
Self-interest is the basic instinct of human being that is developed in the very first year of life
Trust–incentive treatment The reputation in the trust–incentive treatment affects the outcomes, and the results are different from the trust–incentive treatment without reputation
In order to examine whether the reputation affects the performance of trust and/or incentive contract, we conducted
Summary
Self-interest is the basic instinct of human being that is developed in the very first year of life. A child in the first year is characterized by basic needs, such as food, hydration, sleep and security that are pursued due to self-interest (DeLisi and Vaughn, 2016). According to DeLisi and Vaughn (2016), with the passage of time, the language and receptive skills enable the child to communicate sophistically and in an appropriate way. The sense and responsibility that a cooperation mitigates much of the anger and aggressive behavior are adopted in the early childhood. It turns into the more sophisticated idea of rewarding a fair behavior and punishing unfair behavior, defined as reciprocity (Alexander, 1987)[1]. The influence of reciprocity and fairness in the market is recognized. The existence of reciprocity can have important implications, such as in the labor market the minimum wage or the involuntary unemployment
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