Contracts, Fairness, and Incentives

  title={Contracts, Fairness, and Incentives},
  author={Ernst Fehr and Alexander Klein and Klaus M. Schmidt},
We show experimentally that fairness concerns may have a decisive impact on both the actual and the optimal choice of contracts in a moral hazard context. Explicit incentive contracts that are optimal according to self-interest theory become inferior when some agents value fairness. Conversely, implicit bonus contracts that are doomed to fail among purely selfish actors provide powerful incentives and become superior when there are some fair-minded players. The principals understand this and… CONTINUE READING