Optimal Group Incentives with Social Preferences and Self-Selection

Sabrina Teyssier

No 710, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: In this paper, we analyze group incentives when a proportion of agents feel in- equity aversion as defined by Fehr and Schmidt (1999). We define a separating equilibrium that explains the co-existence of multiple payment schemes in firms. We show that a tournament provides strong incentives to agents who only care about their own payo¤ but that it is not efficient when agents are inequity averse. In fact, inequity averse agents are attracted by a revenue-sharing scheme in which the joint production is equally distributed, under the constraint that selfish agents have no incentive to join the revenue sharing organization. If the market is perfectly flexi- ble, this separating equilibrium induces a high effort level for both types of agents. Pareto gains are achieved by offering organizational choice to agents and the optimal contract is thus to propose both payment schemes to agents and to allow them to self-select into the different payment schemes.

Keywords: Incentives; performance pay; revenue sharing; self-selection; social preferences; tournament (search for similar items in EconPapers)
JEL-codes: D63 D82 J31 J33 M52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-04
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Optimal Group Incentives with Social Preferences and Self-Selection (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:0710

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