Fairness, Incentives and Contractual Incompleteness∗

Abstract: We report on a series of experiments that show that concerns for fairness 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 results are consistent with the theory of inequity aversion. Furthermore, they suggest that the existence of fair actors may be an important reason why many contracts are left deliberatel