This paper investigates in a principal-agent environment whether and how group membership influences the effectiveness of incentives and when incentives can have “hidden costs”, i.e., a detrimental effect. We show experimentally that in all interactions control mechanisms can have hidden...

A simple principal agent problem is experimentally investigated in which a principal repeatedly sets a wage and an agent responds by choosing an effort level. The principal's payoff is determined by the agent's effort. In a first setting the principal can only set a fixed wage in each period. In...