Inequality aversion in long-term contracts

Susumu Cato and Takeshi Ebina

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines a two-period moral hazard model with an inequality-averse agent. We show how the agent's past performance will help the principal to relax incentive compatibility constraints and how the existence of an inequality aversion of the agent affects a level of wage in each period in a long-term contract. In particular, we focus on the performance in period 1 on the level of wage in period 2. We show that the agent's wage in period 2 depends on performance in periods 1 and 2. This implies that the long-term relationship creates the opportunity for intertemporal risk and inequality sharing.

Keywords: Moral hazard; Inequality aversion; Behavioral contract theory; Distribution (search for similar items in EconPapers)
JEL-codes: D63 D86 J31 L23 (search for similar items in EconPapers)
Date: 2014-11-14
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-hrm, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:59893

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