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Fair Contracts

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  • Shingo Ishiguro

    ()
    (Graduate School of Economics, Osaka University)

Abstract

In this paper we present an axiomatic approach to characterize the optimal contracts, which we call gfair contracts,h in the general moral hazard model. The two main axioms we employ are incentive efficiency and no-envyness. The incentive efficiency requires that agents of organization select the Pareto efficient contracts among all possible incentive compatible contracts. No-envyness is equity requirement to ensure that each agent does not envy contracts of others in the same organization. We then show that, due to the tension between incentive efficiency and no-envyness, fair contracts have the very simple feature that risk averse agents are offered the fixed wage to choose only the least costly action.

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File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1130.pdf
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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 11-30.

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Length: 47 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:osk:wpaper:1130

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Web page: http://www.econ.osaka-u.ac.jp/
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Keywords: Moral Hazard; Incentive Contracts; Fairness.;

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  1. Pedro Rey-Biel, 2007. "Inequity Version and Team Incentives," UFAE and IAE Working Papers 677.07, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Florian Englmaier & Achim Wambach, 2002. "Contracts and Inequity Aversion," CESifo Working Paper Series 809, CESifo Group Munich.
  3. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," European Economic Review, Elsevier, vol. 44(4-6), pages 1057-1068, May.
  4. Fehr, Ernst & Schmidt, Klaus M., 2004. "Fairness and incentives in a multi-task principal-agent model," Munich Reprints in Economics 20657, University of Munich, Department of Economics.
  5. Bartling, Björn, 2011. "Relative performance or team evaluation? Optimal contracts for other-regarding agents," Journal of Economic Behavior & Organization, Elsevier, vol. 79(3), pages 183-193, August.
  6. William Thomson, 2007. "Fair Allocation Rules," RCER Working Papers 539, University of Rochester - Center for Economic Research (RCER).
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