Fairness and Reciprocity in Contract Governance

Contract Governance is, amongst others, concerned with solving problems of cooperation and opportunistic behaviour. However, with homo reciprocans as a party to the contract, contractual relationships are necessarily accompanied by expectations of fairness and reciprocity. In this regard, the last two decades have witnessed tremendous progress towards a behavioural account of fairness and its pivotal role in sustaining cooperation. In this article, I sketch some important features of the general working mechanisms of fairness based on a selective review of the literature. It is crucial to distinguish mental, behavioural and social aspects of fairness and to see how these work together. Experimental game theory has focused mainly on the behavioural level and developed two types of models of preferences for fairness: inequity aversion, concerned with the distribution of outcomes, and reciprocity, concerned with the fairness of intentions. Both assume preferences for fairness to interact with selfish preferences that remain a primary motivational force. On the mental level, however, fairness judgments also allow for several proportional criteria of distribution, as Equity Theory in social psychology has shown. The (psychological) necessity to select among different criteria of fairness and their operationalization renders fairness judgments indeterminate and makes them receptive for social and contextual influences. Because of this, homo reciprocans is a rather impressionable being and his behaviour heavily depends on the specifics of the situation and the social context in which he is acting. Compared to homo oeconomicus, cooperation is both easier and more difficult with homo reciprocans. It is easier because reciprocity repays cooperation with cooperation. It is more difficult because opportunistic behaviour by selfish types, usually mixed into real-life populations, triggers negative reciprocity on the side of reciprocal actors causing a downward spiral that eventually extinguishes cooperation. Furthermore, even fairness judgments are unconsciously biased toward self-interest if and insofar as factual knowledge or normative standards are ambiguous. Sanctions therefore remain crucial to sustain cooperation, but they assume quite a different objective compared to homo oeconomicus. With homo reciprocans, sanctions have to provide social or moral incentives in order to sustain positive reciprocity, and they do so indirectly by preventing opportunism and thus keeping social relations fair or balanced. Negative reciprocity provides sufficient motivation to leave punishment to the parties, but excess punishment and anti-cooperative punishment, combined with self-serving perceptions, call for institutional intervention in order to prevent a vicious circle. Although people in general show an aversion against punishment institutions, they are accepted as legitimate if they are chosen autonomously. Furthermore, because of the indeterminacy of fairness, there is a need to settle on shared fairness standards, if cooperation is to be based on positive reciprocity and protected against negative reciprocity. This creates a higher-order coordination problem, which institutions can help to solve, because fairness judgments intrinsically rely on reference points that institutions can provide. In Contract Governance, both statutes and contracts can serve this purpose through their expressive effect. Also, the mere fact of making a promise and the 'procedure' of doing so with reference to the law induces a commitment to the contract. In short, Contract Governance has to tame and institutionalise sanctions and it has to coordinate fairness standards via the expressive dimension of norms and contracts.

Stefan Magen, 2013. "Fairness and Reciprocity in Contract Governance," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2013_21, Max Planck Institute for Research on Collective Goods.

Handle: RePEc:mpg:wpaper:2013_21

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