Fairness, Incentives, and Contractual Choices

Ernst Fehr and Klaus M. Schmidt

No 20, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

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.

Keywords: Fairness; Reciprocity; Incomplete Contracts; Incentives (search for similar items in EconPapers)
JEL-codes: C7 C9 J3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-ind and nep-mic
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Citations: View citations in EconPapers (77)

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Related works:
Journal Article: Fairness, incentives, and contractual choices (2000)
Working Paper: Fairness, incentives, and contractual choices (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:020

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