Fairness, incentives, and contractual choices

This gaper examines how the presence of a non-negligible fraction of recipr ocally fair actors changes the provision of incentives through contracts. W e provide experimental evidence that principals have a strong preference fo r less complete contracts although the standard self-interest model predict s that they should prefer the more complete contract. Our theoretical analy sis shows that fairness concerns can explain this preference for less compl eteness. Fair principals keep their promises which provides strong pecuniar y incentives through an incomplete contract. Selfish principals free-ride a nd exploit the agents. Counter-intuitively, selfish agents are induced to w ork by an incomplete contract while fair agents shirk. (C) 2000 Elsevier Sc ience B.V. All rights reserved. JEL classification: C7; C9; D0; J3.