Costly Rewards Sustain Cooperation with Imperfect Monitoring

This research examines the role of reward systems in enhancing cooperation, particularly when individual contributions are not fully transparent. We investigate the impact of reward mechanisms on cooperative behavior using an experimental setup known as the Voluntary Contribution Mechanism with Rewards. Our experimental design compares centralized reward (CR) systems, where an authority distributes rewards, with decentralized reward (DR) systems, where peers allocate rewards, against a no-reward baseline. The results reveal that CR generally promotes the highest level of cooperation, whereas DR achieves the greatest economic efficiency across all test environments. Participants also exhibited a strong preference for CR. These findings contribute to the existing literature by highlighting the effectiveness of reward systems in mitigating social dilemmas under conditions of imperfect information. The study offers vital insights for policymakers and organizational members in selecting incentive mechanisms that foster sustained collective action, even when individual efforts are not directly observable. This paper was accepted by Dorothea Kubler, behavioral economics and decision analysis. Funding: Financial support from the National Natural Science Foundation of China [Grants 72503075 and 72203132]; the National Social Science Foundation of China [Grants 20AZD044, 22&ZD150, and 24&ZD084]; the Natural Science Foundation of Shandong Province [Grants ZR2023QG096, ZR2023QG071, ZR2022MG068, and ZR2022QG048]; the Taishan Scholar Program of Shandong Province [Grant tsqn201909013 and tsqn202408212]; and the Project of Humanities and Social Sciences of Shandong University [Grant 21RWZD15] is gratefully acknowledged. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06479 .