Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem

In the hold-up problem incomplete contracts cause the proceeds of relation specific investments to be allocated by ex-post bargaining. The present paper investigates the efficiency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and - equally important - preferences are private information. As the sunk investment costs can thus potentially signal preferences, they can influence beliefs and consequently bargaining outcomes. The necessities of signalling are shown to generate very strong investment incentives. These incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining. After finding all perfect Bayesian equilibria in pure strategies, the paper derives the necessary and sufficient conditions under which it is optimal to invest and trade efficiently

Fairness, Adverse Selection, and Employment Contracts

This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both types are to be employed, thereby rendering the optimal employment contracts discontinuous in the fraction of fair-minded workers. As a result, fairness might infuence the employment contracts of all workers although only some are fair-minded, and identical firms facing very similar pools of workers might employ very different remuneration schemes

Higher education and the promises and perils of social network

The last decade has produced tremendous innovation in how people connect with one another online. Social networks have experienced a rapid increase in popularity, producing both concerns (privacy, content ownership) and opportunities. The articles in this journal can be viewed as attempts to answer the question: What should educators do about social networks

Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem

In the hold-up problem incomplete contracts cause the proceeds of relation specific investments to be allocated by ex-post bargaining. The present paper investigates the efficiency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and - equally important - preferences are private information. As the sunk investment costs can thus potentially signal preferences, they can influence beliefs and consequently bargaining outcomes. The necessities of signalling are shown to generate very strong investment incentives. These incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining. After finding all perfect Bayesian equilibria in pure strategies, the paper derives the necessary and sufficient conditions under which it is optimal to invest and trade efficiently.Incomplete Contracts; Hold-Up; Fairness; Bargaining under Incomplete Information; Signalling

Fairness, Adverse Selection, and Employment Contracts

This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both types are to be employed, thereby rendering the optimal employment contracts discontinuous in the fraction of fair-minded workers. As a result, fairness might influence the employment contracts of all workers although only some are fair-minded, and identical firms facing very similar pools of workers might employ very different remuneration schemes.Fairness; Employment Contracts; Adverse Selection; Screening; Heterogeneity in Organizational Form

Fairness, Adverse Selection, and Employment Contracts

This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both types are to be employed, thereby rendering the optimal employment contracts discontinuous in the fraction of fair-minded workers. As a result, fairness might infuence the employment contracts of all workers although only some are fair-minded, and identical firms facing very similar pools of workers might employ very different remuneration schemes.Fairness; Employment Contracts; Adverse Selection; Screening; Heterogeneity in Organizational Form

Intention-Based Reciprocity and the Hidden Costs of Control

Empirical research suggests that - rather than improving incentives - exerting control can reduce workers' performance by eroding motivation. The present paper shows that intention-based reciprocity can cause such motivational crowding-out if individuals differ in their propensity for reciprocity and preferences are private information. Not being controlled might then be considered to be kind, because not everybody reciprocates not being controlled with high effort. This argument stands in contrast to existing theoretical wisdom on motivational crowding-out that is primarily based on signaling models.extrinsic and intrinsic motivation, crowding-out, intention-based reciprocity, incomplete information, hidden costs of control

Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem

In the hold-up problem incomplete contracts cause the proceeds of relation-specific investments to be allocated by ex-post bargaining. The present paper investigates the efficiency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and - equally important - preferences are private information. As the sunk investment costs can thus potentially signal preferences, they can influence beliefs and consequently bargaining outcomes. The necessities of signalling are shown to generate very strong investment incentives. These incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining. After finding all perfect Bayesian equilibria in pure strategies, the paper derives the necessary and sufficient conditions under which it is optimal to invest and trade efficiently.Incomplete Contracts; Hold-Up; Fairness; Bargaining under Incomplete Information; Signalling

The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents

While most market transactions are subject to strong incentives, transactions within firms are often not incentivized. We offer an explanation for this observation based on envy among agents in an otherwise standard moral hazard model with multiple agents. Envious agents suffer if other agents receive a higher wage due to random shocks to their performance measures. The necessary compensation for expected envy renders incentive provision more expensive, which generates a tendency towards flat-wage contracts. Moreover, empirical evidence suggests that social comparisons like envy are more pronounced among employees within firms than among individuals who interact only in the market. Flat-wage contracts are thus more likely to be optimal in firms than in markets

Equal Sharing Rules in Partnerships

Partnerships are the prevalent organizational form in many industries. Most partnerships share profits equally among the partners. Following Kandel and Lazear (1992) it is often argued that ``peer pressure'' mitigates the arising free-rider problem. This line of reasoning takes the equal sharing rule as exogenously given. The purpose of our paper is to show that with inequity averse partners - a behavioral assumption akin to peer pressure - the equal sharing rule arises endogenously as an optimal solution to the incentive problem in a partnership