Optimal incentive contracts under inequity aversion

Florian Englmaier and Achim Wambach

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: We analyze the classic moral hazard problem with the additional assumption that agents are inequity averse. The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules. The sufficient statistics result is violated. Depending on the environment, contracts may be either overdetermined, i.e. include non-informative performance measures, or incomplete, i.e. neglect informative performance measures. Finally, our model delivers a simple rationale for team based incentives, implying wage compression. © 2010 Elsevier Inc.

Date: 2010
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Citations: View citations in EconPapers (109)

Published in Games and Economic Behavior 2 69(2010): pp. 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 (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:22027

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