Fairness, Incentives and Contractual Incompleteness

Fehr, Ernst; Klein, Alexander and Schmidt, Klaus M. (January 2001): Fairness, Incentives and Contractual Incompleteness. Discussion Papers in Economics 2001-7

Abstract

We show that concerns for fairness may have dramatic consequences for the optimal provision of incentives in a moral hazard context. Incentive contracts that are optimal when there are only selfish actors become inferior when some agents are concerned about fairness. Conversely, contracts that are doomed to fail when there are only selfish actors provide powerful incentives and become superior when there are also fair-minded players. These predictions are strongly supported by the results of a series of experiments. Furthermore, our results suggest that the existence of fair actors may be an important reason why many contracts are left deliberately incomplete.

• Item Type: Paper
• Keywords: Incentive Contracts ; Moral Hazard ; Fairness ; Reciprocity ; Incomplete Contracts
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Micro-Economics; Economics > Munich Discussion Papers in Economics > Behavioral Economics; Economics > Munich Discussion Papers in Economics > Institutional Economics; Economics > Chairs > Seminar for Economic Theory
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: C7, C9, J3
• Language: English