Showing papers by "Klaus M. Schmidt published in 2005"

The Economics of Fairness, Reciprocity and Altruism--Experimental Evidence and New Theories.

Abstract: Most economic models are based on the self-interest hypothesis that assumes that material self-interest exclusively motivates all people. Experimental economists have gathered overwhelming evidence in recent years, however, that systematically refutes the self-interest hypothesis, suggesting that concerns for altruism, fairness, and reciprocity strongly motivate many people. Moreover, several theoretical papers demonstrate that the observed phenomena can be explained in a rigorous and tractable manner. These theories then induced a first wave of experimental research which offered exciting insights into both the nature of preferences and the relative performance of competing fairness theories. The purpose of this chapter is to review these developments, to point out open questions, and to suggest avenues for future research. We also discuss recent neuroeconomic evidence that is consistent with the view that many people have a taste for mutual cooperation and the punishment of norm violators. We further illustrate the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design.

The Economics of Fairness, Reciprocity and Altruism – Experimental Evidence and New Theories

Abstract: This paper surveys recent experimental and field evidence on the impact of concerns for fairness, reciprocity and altruism on economic decision making. It also reviews some new theoretical attempts to model the observed behavior.

Fairness and Contract Design

Abstract: 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 upfront are less efficient than incentive contracts. The principals understand this and predominantly choose the bonus contracts. Our results are consistent with recently developed theories of fairness, which offer important new insights into the interaction of contract choices, fairness and incentives.

An Economic Approach to Article 82

Abstract: This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.

An Economic Approach to Article 82. Report by the European Advisory Group on Competition Policy

Abstract: This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.

Fairness and the Optimal Allocation of Ownership Rights

Abstract: We report on several experiments on the optimal allocation of ownership rights. The experiments confirm the property rights approach by showing that the ownership structure affects relationship-specific investments and that subjects attain the most efficient ownership allocation despite starting from different initial conditions. However, in contrast to the property rights approach, the most efficient ownership structure is joint ownership. These results are neither consistent with the self-interest model nor with models that assume that all people behave fairly, but they can be explained by the theory of inequity aversion that focuses on the interaction between selfish and fair players.

The Rhetoric of Inequity Aversion- A Reply

Abstract: In a recent “pamphlet” Shaked (2005) harshly criticizes two of our papers, Fehr and Schmidt (1999, 2003). This reply shows that Shaked's charges are not substantiated in any way. It points out several logical flaws in his arguments and shows that he grossly misquotes and misinterprets our papers. * This note is a reply to A. Shaked, “The Rhetoric of Inequity Aversion”, dated March 1, 2005. a) Ernst Fehr, Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH8006 Zurich, Switzerland, email: efehr@iew.unizh.ch (corresponding author). b) Klaus M. Schmidt, Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Muenchen, Germany, email: klaus.schmidt@Lrz.uni-muenchen.de.

The Role of Equality and Equity in Social Preferences

Abstract: Engelmann and Strobel (AER 2004) question the relevance of inequity aversion in simple dictator game experiments claiming that a combination of a preference for efficiency and a Rawlsian motive for helping the least well-off is more important than inequity aversion. We show that these results are partly based on a strong subject pool effect. The participants of the E&S experiments were undergraduate students of economics and business administration who self-selected into their field of study (economics) and learned in the first semester that efficiency is desirable. We show that for non-economists the preference for efficiency is much less pronounced. We also find a non-negligible gender effect indicating that women are more egalitarian than men. However, perhaps surprisingly, the dominance of equality over efficiency is unrelated to political attitudes.