When Transparency Fails: Financial Incentives for Local Banking Agents in Indonesia

Abstract

We study the effect of raising thelevelandtransparencyof financial incentivesoffered to local agents for acquiring clients of a new banking product on take-up. Wefind that paying agents higher incentives increases take-up and usage, but only whenthe incentives are unknown to prospective clients. When disclosed, higher incentiveshave no effect on take-up and usage, despite greater agent effort. This is due to thefinancial incentives sending anegative signalto potential clients about the reliabilityand trustworthiness of the product. Hence, when designing incentives, organizationsshould consider both their level and transparency.