Explicit and implicit incentives and opportunities for mutually beneficial voluntary cooperation coexist in many economic relationships. In a series of eight laboratory gift-exchange experiments, we show that incentives can lead to crowding out of voluntary cooperation even after they have been abolished. This crowding-out also occurs in repeated relationships, which otherwise strongly increase effort compared to one-shot interactions. Using a unified econometric framework, we unpack these results as a function of positive and negative reciprocity, as well as the principals’ wage offer and the incentive compatibility of the contract. Crowding-out occurs mostly due to reduced wages and not a change in reciprocal wage–effort relationships. Our systematic analysis also replicates established results on gift exchange, incentives, and crowding out of voluntary cooperation while being exposed to incentives. Overall, our findings show that the behavioral consequences of explicit incentives strongly depend on the features of the situation in which they are embedded.

We investigate a number of canonical predictions that arise from relational contract theory. Employing an experimental design with endogenous choice of contract type, we find considerable experimental support for several well-established predictions, including the importance of self-enforcement and individual rationality constraints for contractual performance; a preference for informal agreements when third-party verification of performance is coarse; and a tendency toward strategic ambiguity (Bernheim and Whinston Am Econ Rev 88(4):902–932, 1998). However, two findings that appear to be inconsistent with theory are that (1) contractually specified performance levels do not appear to respond to the discount factor though realized performance does; and (2) subjects often apply inefficient punishments following a deviation. By providing evidence on the strengths and weaknesses of standard relational contract theory, our study shows where there is room for improvement. We conjecture that incorporating social preferences and semi-grim strategies (Breitmoser Am Econ Rev 105(9):2882–2910, 2015) can potentially address the observed weaknesses.