Optimal Incentive Contracts under Inequity Aversion

Florian Englmaier and Achim Wambach

No 1643, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We analyze the Moral Hazard problem, assuming that agents are inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. We find: First, inequity aversion alters the structure of optimal contracts. Second, there is a strong tendency towards linear sharing rules. Third, it delivers a simple rationale for team based incentives in many environments. Fourth, the Sufficient Statistics Result is violated. Dependent on the environment, optimal contracts may be either overdetermined or incomplete.

Keywords: inequity aversion; sufficient statistics result; incentives; linear contracts; contract theory; incomplete contracts (search for similar items in EconPapers)
JEL-codes: D23 D63 J31 J33 M12 Z13 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2005-06
References: Add references at CitEc
Citations: View citations in EconPapers (39)

Published - published in: Games and Economic Behavior, 2010, 69 (2), 312-328

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Related works:
Journal Article: Optimal incentive contracts under inequity aversion (2010)
Working Paper: Optimal incentive contracts under inequity aversion (2010)
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