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Fairness, Incentives and Contractual Incompleteness

Author

Listed:
  • Ernst Fehr
  • Alexander Klein
  • Klaus Schmidt

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.

Suggested Citation

  • Ernst Fehr & Alexander Klein & Klaus Schmidt, 2001. "Fairness, Incentives and Contractual Incompleteness," CESifo Working Paper Series 445, CESifo.
    • Handle: RePEc:ces:ceswps:_445
    as

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    References listed on IDEAS

    as
    1. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 115-138.
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    More about this item

    Keywords

    Incentive contracts; moral hazard; fairness; reciprocity; incomplete contracts;
    All these keywords.

    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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