Fairness, Incentives and Contractual Incompleteness

By Ernst Fehr, Alexander Klein, Klaus M. Schmidt. Social Science Research Network, 2001

156 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/bc6e60d83c87fe09380c3bb90ea1e6b41d10bf77

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

Citations in the corpus

How Many Winners are Good to Have? On Tournaments with Sabotage (2008, unknown): “…how subjects’ behavior is influenced by different contract designs (GÜTH, KLOSE, KÖNIGSTEIN, and SCHWALBACH 1998, CABRALES and CHARNESS 2000, FEHR, KLEIN, and SCHMIDT 2001, GÜTH, KÖNIGSTEIN, KOVACS, and ZALAMEZO 2001, ANDERHUB, GÄCHTER, and KÖNIGSTEIN 2002, IRLENBUSCH and SLIWKA 2005).”
Fairness, Reciprocity, and Wage Rigidity (2004, unknown): “These experiments are described in Fehr, Kirchsteiger, and Riedl (1996), Fehr, Gächter, and Kirchsteiger (1997), Fehr, Klein, and Schmidt (2001), and Fehr and Gächter (2002).”
The hidden costs of control (2006, result): “In contrast to previous experiments (Ernst Fehr and Simon Gächter, 2002; Fehr and Bettina Rockenbach, 2003; Fehr and John A. List, 2004; Fehr et al., 2004) it does not pay for the principal to trust in our model because trusting results in a higher payoff to the agent which is reciprocated.”
Incentives and Prosocial Behavior (2006, background): “, Fehr and Gächter (2000), Bohnet et al.”
Order with Some Law: Complementarity versus Substitution of Formal and Informal Arrangements (2004, unknown): “Although we focus on different issues, our assumption that the good is multidimensional has parallels with multitask principal-agent models (Fehr et al., 2001; Holmstrom and Milgrom, 1991).”
Envy and Compassion in Tournaments (2005, background): “Recent papers that have examined moral hazard problems with a single agent in view of inequity aversion are Englmaier and Wambach (2002) and Fehr et al. (2002).”