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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.

Suggested Citation

  • Shingo Ishiguro, 2011. "Fair Contracts," Discussion Papers in Economics and Business 11-30, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:1130
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1130.pdf
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    References listed on IDEAS

    as
    1. Pedro Rey-Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, June.
    2. Ernst Fehr & Klaus M. Schmidt, 2004. "Fairness and Incentives in a Multi-task Principal-Agent Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 453-474, October.
    3. Florian Englmaier & Achim Wambach, 2002. "Contracts and Inequity Aversion," CESifo Working Paper Series 809, CESifo Group Munich.
    4. William Thomson, 2007. "Fair Allocation Rules," RCER Working Papers 539, University of Rochester - Center for Economic Research (RCER).
    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. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," European Economic Review, Elsevier, vol. 44(4-6), pages 1057-1068, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Moral Hazard; Incentive Contracts; Fairness.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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