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Fairness, incentives, and contractual choices

  • Fehr, Ernst
  • Schmidt, Klaus M.

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.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20659.

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Date of creation: 2000
Date of revision:
Publication status: Published in European Economic Review 4-6 44(2000): pp. 1057-1068
Handle: RePEc:lmu:muenar:20659
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  1. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  2. Margin Dufwenberg & Georg Kirchsteiger, 2001. "A Theory of Sequential Reciprocity," Levine's Working Paper Archive 563824000000000090, David K. Levine.
  3. Clark, Andrew E. & Oswald, Andrew J., 1994. "Satisfaction and comparison income," CEPREMAP Working Papers (Couverture Orange) 9408, CEPREMAP.
  4. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  5. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-54, May.
  6. Georg Kirchsteiger & Ernst Fehr & Simon G├Ąchter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  7. Jacob K. Goeree & Charles A. Holt, . "Asymmetric Inequality Aversion and Noisy Behavior in Alternating-Offer Bargaining Games," Virginia Economics Online Papers 329, University of Virginia, Department of Economics.
  8. Gary E Bolton & Axel Ockenfels, 1997. "A Theory of Equity, Reciprocity, and Competition," Levine's Working Paper Archive 1889, David K. Levine.
  9. Agell, Jonas & Lundborg, Per, 1995. " Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 295-307, June.
  10. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine.
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