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Contracts and Inequity Aversion

Florian Englmaier () and Achim Wambach ()

No 74, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: Inequity aversion is a special form of other regarding preferences and captures many features of reciprocal behavior, an apparently robust pattern in human nature. Using this concept we analyze the Moral Hazard problem and derive several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be ''too'' complete. Along with these key insights we derive a couple of further results.

Keywords: contract theory; linear contracts; incentives; sufficient statistics result; inequity aversion (search for similar items in EconPapers)
JEL-codes: D63 J3 M12 Z13 (search for similar items in EconPapers)
Date: 2003-06-04
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