Econometrica: Jan 2007, Volume 75, Issue 1

Fairness and Contract Design

https://doi.org/10.1111/j.1468-0262.2007.00734.x
p. 121-154

Ernst Fehr, Alexander Klein, Klaus M Schmidt

We show experimentally that fairness concerns may have a decisive impact on the actual and optimal choice of contracts in a moral hazard context. Bonus contracts that offer a voluntary and unenforceable bonus for satisfactory performance provide powerful incentives and are superior to explicit incentive contracts when there are some fair‐minded players, but trust contracts that pay a generous wage up front are less efficient than incentive contracts. The principals understand this and predominantly choose the bonus contracts. These results are consistent with recently developed theories of fairness, which offer important new insights into the interaction of contract choices, fairness, and incentives.

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Supplemental Material

"Fairness and Contract Design", Supplementary Material: Appendix

In this appendix we provide the complete theoretical analysis of Section 5. The propositions in the main part of the paper follow immediately from the propositions proved here. We also provide some additional experimental data at the end of the appendix.

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"Fairness and Contract Design", Supplementary Material: Instructions

This file contains the complete instructions of the Bonus-Incentive Treatment (sessions S3 and S4) translated from German to English. The instructions of the Trust-Incentive Treatment (S1 and S2) and the Control Treatment (S5 and S6) are structured similarly and are not reported here for space reasons, but they and all the original instructions in German are available from the authors upon request.

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"Fairness and Contract Design", Supplementary Material: Data Description

This file contains description of the following data files:MS5182-S1andS2.txtMS5182-S3andS4.txtMS5182-S5andS6.txt

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"Fairness and Contract Design", Supplementary Material: Data 1

File MS5182-S1andS2.txt: Data of sessions S1 and S2 (Trust versus Incentive Treatment).

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"Fairness and Contract Design", Supplementary Material: Data 2

File MS5182-S3andS4.txt: Data of sessions S3 and S4 (Bonus versus Incentive Treatment).

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"Fairness and Contract Design", Supplementary Material: Data 3

File MS5182-S5andS6.txt: Data of sessions S5 and S6 (Control Treatment).

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