A NOTE ON ENVY AND EARNINGS INEQUALITY UNDER LIMITED LIABILITY CONTRACTS

Kangsik Choi

Hitotsubashi Journal of Economics, 2016, vol. 57, issue 1, 91-109

Abstract: The paper analyzes an ex-ante contracting with limited liability constraints when agents feel envious of others' higher wages. We show that depending on the degree of limited liability constraints, the principal requires various distortions in output at both the top and bottom productivity levels for agent's type. Compared to the result without envy, the output gap between efficient and inefficient agents is less spread out. Moreover, when the degree of envy is sufficiently large, bunching can always occur. Hence, the first-best solutions for both types of agent are never obtained with envy regardless of the burden of limited liability.

Keywords: envy; limited liability; ex-ante contracting; distortion (search for similar items in EconPapers)
JEL-codes: D82 J31 M21 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitjec:v:57:y:2016:i:1:p:91-109

DOI: 10.15057/27940

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