Contracts and Inequity Aversion
AbstractUsing the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be ”too” complete. Along with these key insights we derive a couple of further results.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 809.
Date of creation: 2002
Date of revision:
contract theory; linear contracts; incentives; sufficient statistics result; inequity aversion; fairness;
Other versions of this item:
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executives; Executive Compensation
- Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Social and Economic Stratification
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ULB Institutional Repository
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- Fehr, Ernst & Schmidt, Klaus M., 1998.
"A Theory of Fairness, Competition and Cooperation,"
CEPR Discussion Papers
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Labor and Demography
- Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
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