Output and Wages with Inequality Averse Agents

Dominique Demougin (), Claude Fluet () and Carsten Helm

Cahiers de recherche from CIRPEE

Abstract: We analyze a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract which, due to his wealth constraint, leads to a rent that the other agent resents. We show that inequality aversion affects the optimal contracts of both agents. Greater inequality aversion reduces the effort, wage and payoff of agent 1, while the effects on the wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function. However, more inequality aversion unambiguously decreases total output and therefore average labor productivity.

Keywords: Inequality aversion; wage compression; moral hazard; incentives (search for similar items in EconPapers)
JEL-codes: D63 D2 J3 L2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2004
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Related works:
Working Paper: Output and Wages with Inequality Averse Agents (2004)
Journal Article: Output and wages with inequality averse agents (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:lvl:lacicr:0419

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