Fairness Within Firms: The Case of One Principal and Multiple Agents

Many experimental studies report evidence of fairness in bargaining games. More recently fairness and its consequences for productive efficiency have been explored in principal-agent games, in which a single principal meets a single agent. However, in most organizations, there are usually many agents in one layer of a firm's hierarchy. Consequently, fairness considerations may be based on a comparison between layers (vertical fairness) as well as within a layer (horizontal fairness). In this paper we report an experiment in which a principal faces two agents with deterministic but unequal productivity. The experimental treatment variable is the information that one agent has about the other agent's contract offer. When work contracts are observable, the principal offers less asymmetric contracts (pay compression) than when contracts are not observable, i.e., horizontal fairness matters.