An Incentive Mechanism under Fairness Preference

Abstract

Some empirical studies from the fields of behavioral economics and psychology game theory have indicated that the people concern about fairness in monetary distribution rather than only pursue private profits. Through using fair psychological regularity to weaken rationality assumption of traditional economics, this paper builds a new principal-agent model based on fairness preference theory. And then the model parameters are concretized to study incentive contracts and incentive efficiency of players under fairness preference of agents. As a result, the concern about fairness has considerable influences on the structure and efficiency of incentive contracts, and it also can impact positively on optimal effort level of agents. And the reciprocal contract based on new model is a Pareto improvement for traditional ones.