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Output and wages with inequality averse agents

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  • Dominique Demougin
  • Claude Fluet
  • Carsten Helm

Abstract

We analyse a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 39 (2006)
Issue (Month): 2 (May)
Pages: 399-413

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Handle: RePEc:cje:issued:v:39:y:2006:i:2:p:399-413

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  1. Benjamin Bental & Dominique Demougin, 2006. "Incentive Contracts And Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 1033-1055, 08.
  2. Alesina, Alberto & Di Tella, Rafael & MacCulloch, Robert, 2004. "Inequality and happiness: are Europeans and Americans different?," Journal of Public Economics, Elsevier, Elsevier, vol. 88(9-10), pages 2009-2042, August.
  3. Dominique Demougin & Claude Fluet, 2003. "Group vs. Individual Performance Pay When Workers Are Envious," CIRANO Working Papers, CIRANO 2003s-10, CIRANO.
  4. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics, University of Munich, Department of Economics 20650, University of Munich, Department of Economics.
  5. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(5), pages 874-904, October.
  6. Florian Englmaier & Achim Wambach, 2002. "Contracts and Inequity Aversion," CESifo Working Paper Series 809, CESifo Group Munich.
  7. Schwarze, Johannes & Härpfer, Marco, 2003. "Are People Inequality Averse, and Do They Prefer Redistribution by the State? A Revised Version," IZA Discussion Papers 974, Institute for the Study of Labor (IZA).
  8. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 83-116, February.
  9. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity," Discussion Papers in Economics, University of Munich, Department of Economics 14, University of Munich, Department of Economics.
  10. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, Elsevier, vol. 45(9), pages 1741-1764, October.
  11. James Konow, 2003. "Which Is the Fairest One of All? A Positive Analysis of Justice Theories," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1188-1239, December.
  12. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 55(1), pages 18-45.
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