When transparency fails: Financial incentives for local banking agents in Indonesia

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, but only when the incentives are unknown to
prospective clients. When disclosed, higher incentives instead have no effect on take-up, 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 potential
clients. In contexts with limited information about a new technology, financial incentives can
thus affect technology adoption through both a supply-side effect (more agent effort) as well
as a demand-side signaling effect (change in demand perceptions). Organizations designing
incentive schemes should therefore pay close attention to both the level and the transparency
of such incentives.