“Do Incentive Contracts Crowd Out Voluntary Cooperation?”, 2001-11-05 (; backlinks; similar):
In this paper we provide experimental evidence indicating that incentive contracts may cause a strong crowding out of voluntary cooperation.
This crowding-out effect constitutes costs of incentive provision that have been largely neglected by economists. In our experiments the crowding-out effect is so strong that the incentive contracts are less efficient than contracts without any incentives.
Principals, nonetheless, prefer the incentive contracts because they allow them to appropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them.