Working Paper: CEPR ID: DP2790
Authors: 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 with 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.
Keywords: fairness; incentive contracts; incomplete contracts; moral hazard; reciprocity
JEL Codes: C70; C90; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fair-minded individuals (D63) | effectiveness of incentive contracts (D86) |
| contract type (incentive vs. bonus) (J33) | agent effort (L85) |
| presence of fair actors (D79) | expected outcomes of contracts (L14) |
| fairness (D63) | contract efficiency (D61) |
| proportion of fair-minded individuals (D63) | effectiveness of contracts (D86) |
| contract type (incentive vs. bonus) (J33) | contract performance (D86) |
| fair actors (L17) | choice of contracts by principals (D86) |