Incentives or Persuasion? An Experimental Investigation1

A principal can influence agent’s actions through monetary transfers (Mechanism Design) or Bayesian persuasion (Information Design). We provide an experimental comparison of these incentive structures using theoretically equivalent games. Behavior in Information Design is in line with the theory, however the equivalence breaks down in Mechanism Design due to agents’ high monetary demands. Principals extract higher rents by persuading than incentivizing agents. Nevertheless, agents are able to capture a significant proportion of principals’ surplus due to their bargaining power arising from outside options. While equivalent in theory, Mechanism and Information Design produce different behavior and welfare effects