Fairness, Incentives, and Contractual Choices

Institute for Empirical Research in Economics Working Paper No. 20

15 Pages Posted: 20 Feb 2000

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: September 1999

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.

JEL Classification: C7, C9, D0, J3

Suggested Citation

Fehr, Ernst and Schmidt, Klaus M., Fairness, Incentives, and Contractual Choices (September 1999). Institute for Empirical Research in Economics Working Paper No. 20, Available at SSRN: https://ssrn.com/abstract=203309 or http://dx.doi.org/10.2139/ssrn.203309

Ernst Fehr (Contact Author)

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Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

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Germany
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+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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