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Fairness and the Optimal Allocation of Ownership Rights

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  • Fehr, Ernst
  • Kremhelmer, Susanne
  • Schmidt, Klaus M.

Abstract

We report on several experiments on the optimal allocation of ownership rights. The experiments confirm the property rights approach by showing that the ownership structure affects relationship-specific investments and that subjects attain the most efficient ownership allocation despite starting from different initial conditions. However, in contrast to the property rights approach, the most efficient ownership structure is joint ownership. These results are neither consistent with the self-interest model nor with models that assume that all people behave fairly, but they can be explained by the theory of inequity aversion that focuses on the interaction between selfish and fair players.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5369.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5369
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Keywords: double moral hazard; fairness; incomplete contracts; ownership rights; reciprocity;

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Find related papers by JEL classification:
  • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
  • C9 - Mathematical and Quantitative Methods - - Design of Experiments
  • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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  1. Ernst Fehr & Alexander Klein & Klaus Schmidt, 2004. "Contracts, Fairness, and Incentives," CESifo Working Paper Series 1215, CESifo Group Munich.
  2. Nöldeke, Georg & Schmidt, Klaus M., 1997. "Sequential Investments and Options to Own," CEPR Discussion Papers 1645, C.E.P.R. Discussion Papers.
  3. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," SSE/EFI Working Paper Series in Economics and Finance 357, Stockholm School of Economics.
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  5. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, December.
  6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  7. Hessel Oosterbeek & Joep Sonnemans & Susan van Velzen, 2003. "The need for marriage contracts: An experimental study," Journal of Population Economics, Springer;European Society for Population Economics, vol. 16(3), pages 431-453, 08.
  8. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching 0303002, EconWPA.
  9. Bernard Salanié, 2003. "Testing Contract Theory," CESifo Economic Studies, CESifo, vol. 49(3), pages 461-477.
  10. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
  11. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  12. Dufwenberg, M. & Kirchsteiger, G., 1998. "A Theory of Sequential Reciprocity," Discussion Paper 1998-37, Tilburg University, Center for Economic Research.
  13. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers 92-199, University of California at Berkeley.
  14. Rosenkranz, Stephanie & Schmitz, Patrick W., 1999. "Know-how disclosure and incomplete contracts," MPRA Paper 12533, University Library of Munich, Germany.
  15. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  16. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine.
  17. Hackett, Steven C, 1994. "Is Relational Exchange Possible in the Absence of Reputations and Repeated Contact?," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 360-89, October.
  18. Tore Ellingsen & Magnus Johannesson, 2004. "Promises, Threats and Fairness," Economic Journal, Royal Economic Society, vol. 114(495), pages 397-420, 04.
  19. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  20. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
  21. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity - Evidence and Economic Applications," CEPR Discussion Papers 2703, C.E.P.R. Discussion Papers.
  22. Gary E Bolton & Axel Ockenfels, 1997. "A Theory of Equity, Reciprocity, and Competition," Levine's Working Paper Archive 1889, David K. Levine.
  23. Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 139-149.
  24. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity," Discussion Papers in Economics 14, University of Munich, Department of Economics.
  25. Gantner, Anita & Guth, Werner & Konigstein, Manfred, 2001. "Equitable choices in bargaining games with joint production," Journal of Economic Behavior & Organization, Elsevier, vol. 46(2), pages 209-225, October.
  26. Geanakoplos, John & Pearce, David & Stacchetti, Ennio, 1989. "Psychological games and sequential rationality," Games and Economic Behavior, Elsevier, vol. 1(1), pages 60-79, March.
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