Inequity aversion and team incentives

Pedro Rey-Biel ()

Microeconomics from EconWPA

Abstract: We study optimal contracts when employees are averse to inequity as modelled by Fehr and Schmidt (1999). A ''selfish'' employer can profitably exploit preferences for equity among his employees by offering contracts which create maximum inequity off-equilibrium and thus, leave employees feeling envy or guilt when they do not produce the optimal output level. We show how the optimal contract is designed such that the subgame played by the employees is dominance solvable, and thus, a unique optimal level of production is implemented. We also discuss conditions for inequity aversion to affect the optimal output choice. Similar results are obtained for other types of distributional preferences such status-seeking or efficiency concerns.

Keywords: 035

Principal; agent; inequity aversion; team incentives; behavioral contract theory (search for similar items in EconPapers)
JEL-codes: D23 D63 (search for similar items in EconPapers)
Date: 2004-07-16
Note: Type of Document - pdf; pages: 30
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http://129.3.20.41/eps/mic/papers/0407/0407009.pdf (application/pdf)

Related works:
Working Paper: Inequity Version and Team Incentives (2007)
Journal Article: Inequity Aversion and Team Incentives (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpmi:0407009

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