Discussion Paper Details

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Title: Fairness and the Optimal Allocation of Ownership Rights

Author(s): Ernst Fehr, Susanne Kremhelmer and Klaus M. Schmidt

Publication Date: November 2005

Keyword(s): double moral hazard, fairness, incomplete contracts, ownership rights and reciprocity

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Fehr, E, Kremhelmer, S and Schmidt, K. 2005. 'Fairness and the Optimal Allocation of Ownership Rights'. London, Centre for Economic Policy Research.