Over-Determinate and Incomplete Contract: Incentive Contract Based on Rabin Motivation Fairness Model

Abstract

When the agent has the motivation fairness preference, the principal of sufficient statistics advocated by the classical contract theory is no longer tenable. By incorporating Rabin motivation fairness model into the classical contract theory, we draw two conclusions: Firstly the optimal contract is over-determinate. That is to say, the optimal incentive contract based on complete information should not only reflect the agent's efforts, but also the external random factors, and agent gets the pay for luck. Secondly the optimal contract is incomplete. That is to say, even though the principal can adopt full supervision on the agent without any cost, he should give up full supervision.