Sticks and Carrots in Procurement

We study differently framed incentives in dynamic laboratory buyer-seller relationships with multi-tasking and endogenous matching. The experimental design tries to mitigate the role of social preferences and intrinsic motivation. Absent explicit incentives, effort is low in both tasks. Their introduction boosts e ciency substantially increasing effort in the contractible task, mildly crowding it out in the non-contractible one, and increasing buyer surplus. Bonuses and penalties are equivalent for efficiency and crowding-out, but different in distributional effects: sellers' surplus increases with bonuses as buyers' offers become more generous. Buyers tend to prefer penalties, which may explain why they are dominant in procurement