Incentive Contracts versus Trust in Three-Person Ultimatum Games- An Experimental Study

Whether incentive contracts perform better than trust in terms of productiveefficiency is usually explored by principal-agent experiments (mostinvolving only one agent). We investigate this issue in the context of athree-person ultimatum experiment, which is simpler and more neutrallyframed than traditional principal-agent designs. Contrary to the gametheoretic prediction, we find that (mutual) trust is as good as incentivecontracts in inducing costly actions by employees. Moreover, we observean interesting order effect when switching from one regime to the other.This could be important when considering institutional change since (accordingto our data) early behavioral patterns may be irreversible.