We conducted online field experiments in large real-world social networks in order to decompose prosocial giving into three components: (1) baseline altruism toward randomly selected strangers, (2) directed altruism that favors friends over random strangers, and (3) giving motivated by the prospect of future interaction. Directed altruism increases giving to friends by 52% relative to random strangers, whereas future interaction effects increase giving by an additional 24% when giving is socially efficient. This finding suggests that future interaction affects giving through a repeated game mechanism where agents can be rewarded for granting efficiency-enhancing favors. We also find that subjects with higher baseline altruism have friends with higher baseline altruism.

Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model. JEL Code: D82, J33, M52.

We argue that contracts establish the norms of a relationship and that individuals incur disutility when deviating from these norms. In a laboratory experiment, we allow agents to make simple contracts before they play one of four games, and the most effective contract always includes an unenforceable “handshake” agreement to take the first-best action. In three games, a contract with only this handshake agreement is (at least weakly) optimal. The handshake is particularly effective in games with strategic complements. Our results highlight an explanation for contractual incompleteness: establishing a norm can effectively substitute for weak enforceable restrictions. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.