Incentives and Discrimination

Eyal Winter ()

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: Optimal incentive mechanisms may require that agents are rewarded differentially even when they are completely identical and are induced to act the same. We demonstrate this point by means of a simple incentive model where agents’ decisions about effort exertion is mapped into a probability that the project will succeed. We give necessary and sufficient conditions for optimal incentive mechanisms to be discriminatory. We also show that full discrimination across all agents is required if and only if the technology has increasing return to scale. In the non-symmetric framework we show that negligible differences in agents’ attributes may result in major differences in rewards in the unique optimal mechanism.

Pages: 16 pages
Date: 2003-05
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Published in American Economic Review, 2004, vol. 94, pp. 764-773.

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Journal Article: Incentives and Discrimination (2004)
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