No contract or unfair contract: What's better?

We investigate the welfare implications of unfair incentive contracts in comparison with interactions without contracts. Reciprocal people should cooperate conditionally in the latter situation but punish unfairness by non-cooperation. We confirm that some people do cooperate conditionally in a sequential prisoner's dilemma. Furthermore, some subjects do not cooperate if they face an unfair incentive contract in a similar context. However, there is no correlation between these two types of reciprocity. At an aggregate level, all contracts – no matter how fair they are – improve welfare even if agents are conditionally cooperative.

► Experiment comparing unfair incentive contracts to interactions without contracts. ► Within-subject comparison. ► We observe conditional cooperation in the situation without contracts and non-cooperative behavior as a reaction to unfair contracts. ► Main result: No correlation between positive and negative reciprocity. ► Welfare is maximized in situations with contracts, irrespective of their fairness.