Fairness, Incentives and Contractual Incompleteness
University of Zurich - Department of Economics
Ludwig-Maximilians-Universität Munich - Faculty of Economics
Klaus M. Schmidt
Ludwig-Maximilians-Universität Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 2790
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.
Number of Pages in PDF File: 46
Keywords: Fairness, incentive contracts, incomplete contracts, moral hazard, reciprocity
JEL Classification: C70, C90, J30working papers series
Date posted: May 10, 2001
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