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

Abstract

We study the effect of raising the level and the transparency of financial incentives offered to local agents for acquiring clients of a new banking product on take-up. We find that paying agents higher incentives increases take-up and usage, but only when the incentives are unknown to prospective clients. When disclosed, higher incentives instead have no effect on take-up and usage, despite greater agent effort. This is explained by the financial incentives conveying a negative signal about the reliability and trustworthiness of the product and its providers to prospective clients. Organizations designing incentive schemes should therefore pay attention to both the level and the transparency of such incentives.