Fairness, Incentives and Contractual Incompleteness

Klaus Schmidt, Ernst Fehr and Alexander Klein

No 2790, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that concerns for fairness may have dramatic consequences for the optimal provision of incentives in a moral hazard context. Incentive contracts that are optimal when there are only selfish actors become inferior when some agents are concerned with fairness. Conversely, contracts that are doomed to fail when there are only selfish actors provide powerful incentives and become superior when there are also fair-minded players. These predictions are strongly supported by the results of a series of experiments. Furthermore, our results suggest that the existence of fair actors may be an important reason why many contracts are left deliberately incomplete.

Keywords: Incentive contracts; Moral hazard; Fairness; Reciprocity; Incomplete contracts (search for similar items in EconPapers)
JEL-codes: C70 C90 J30 (search for similar items in EconPapers)
Date: 2001-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
https://cepr.org/publications/DP2790 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Fairness, Incentives and Contractual Incompleteness (2001)
Working Paper: Fairness, Incentives and Contractual Incompleteness (2001)
Working Paper: Fairness, Incentives and Contractual Incompleteness
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2790

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP2790

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().