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Fairness, incentives, and contractual choices

Author

Listed:
  • Fehr, Ernst
  • Schmidt, Klaus M.

Abstract

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.

Suggested Citation

  • Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," Munich Reprints in Economics 20659, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:20659
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    References listed on IDEAS

    as
    1. 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.
    2. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
    3. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    4. 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.
    5. Goeree, Jacob K. & Holt, Charles A., 2000. "Asymmetric inequality aversion and noisy behavior in alternating-offer bargaining games," European Economic Review, Elsevier, vol. 44(4-6), pages 1079-1089, May.
    6. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    7. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    8. Gary E Bolton & Axel Ockenfels, 1997. "A Theory of Equity, Reciprocity, and Competition," Levine's Working Paper Archive 1889, David K. Levine.
    9. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-254, May.
    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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    More about this item

    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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