Fairness, Incentives and Contractual Incompleteness

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 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 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.