Fairness, incentives, and contractual choices

Ernst Fehr and Klaus M. Schmidt

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: This paper examines how the presence of a non-negligible fraction of reciprocally fair actors changes the provision of incentives through contracts. We provide experimental evidence that principals have a strong preference for less complete contracts although the standard self-interest model predicts that they should prefer the more complete contract. Our theoretical analysis shows that fairness concerns can explain this preference for less completeness. Fair principals keep their promises which provides strong pecuniary incentives through an incomplete contract. Selfish principals free-ride and exploit the agents. Counter-intuitively, selfish agents are induced to work by an incomplete contract while fair agents shirk.

Date: 2000
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Published in European Economic Review 4-6 44(2000): pp. 1057-1068

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Journal Article: Fairness, incentives, and contractual choices (2000)
Working Paper: Fairness, Incentives, and Contractual Choices
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:20659

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