Contracts and Inequity Aversion
Inequity aversion is a special form of other regarding preferences and captures many features of reciprocal behavior, an apparently robust pattern in human nature. Using this concept we analyze the Moral Hazard problem and derive several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be ''too'' complete. Along with these key insights we derive a couple of further results.
|Date of creation:||04 Jun 2003|
|Contact details of provider:|| Postal: 2 Dean Trench Street, Westminster, SW1P 3HE|
Phone: +44 20 3137 6301
Web page: http://www.res.org.uk/society/annualconf.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fehr, Ernst & Schmidt, Klaus M., .
"A theory of fairness, competition, and cooperation,"
Chapters in Economics,
University of Munich, Department of Economics.
- 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.
- Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
- Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
- Ernst Fehr & Klaus M. Schmidt, "undated". "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers 004, Institute for Empirical Research in Economics - University of Zurich.
- Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997.
"Reciprocity as a Contract Enforcement Device: Experimental Evidence,"
Econometric Society, vol. 65(4), pages 833-860, July.
- Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
- Ernst Fehr & Armin Falk, 2003.
"Wage Rigidity in a Competitive Incomplete Contract Market,"
Labor and Demography
- 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.
- J. A. Mirrlees, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 3-21.
- Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
- George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
- Selten, Reinhard, "undated".
"Features of Experimentally Observed Bounded Rationality,"
Discussion Paper Serie B
421, University of Bonn, Germany, revised Nov 1997.
- Selten, Reinhard, 1998. "Features of experimentally observed bounded rationality," European Economic Review, Elsevier, vol. 42(3-5), pages 413-436, May.
- H. Peyton Young, 1996. "The Economics of Convention," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 105-122, Spring.
- H. Peyton Young & Mary A. Burke, 2001. "Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture," American Economic Review, American Economic Association, vol. 91(3), pages 559-573, June.
When requesting a correction, please mention this item's handle: RePEc:ecj:ac2003:74. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.