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Fairness, Incentives and Contractual Incompleteness

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Author Info
Ernst Fehr ()
Alexander Klein
Klaus Schmidt ()

Additional information is available for the following registered author(s):

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 about 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.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 445.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_445

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Related research
Keywords: Incentive contracts; moral hazard; fairness; reciprocity; incomplete contracts;

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Find related papers by JEL classification:
C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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  3. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine. [Downloadable!]
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  7. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
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  20. Albrecht Ritschl & Ulrich Woitek, 2000. "Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy," Working Papers 2000_07, Department of Economics, University of Glasgow. [Downloadable!]
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  21. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February. [Downloadable!] (restricted)
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  24. Lalive, Rafael & van Ours, Jan C. & Zweimüller, Josef, 2000. "The Impact of Active Labor Market Programs and Benefit Entitlement Rules on the Duration of Unemployment," IZA Discussion Papers 149, Institute for the Study of Labor (IZA). [Downloadable!]
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  25. Simon Gächter & Armin Falk, . "Work motivation, institutions, and performance," IEW - Working Papers iewwp062, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  30. Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2001. "Fairness, Incentives and Contractual Incompleteness," CEPR Discussion Papers 2790, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  31. Ernst Fehr & Klaus M. Schmidt, . "Theories of Fairness and Reciprocity - Evidence and Economic Applications," IEW - Working Papers iewwp075, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  32. Ernst Fehr & Peter K. Zych, . "Intertemporal Choice under Habit Formation," IEW - Working Papers iewwp043, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  33. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March. [Downloadable!] (restricted)
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