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Output and Wages with Inequality Averse Agents

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  • Dominique Demougin
  • Claude Fluet

    ()

  • Carsten Helm

Abstract

We analyze 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 which, due to his wealth constraint, leads to a rent that the other agent resents. We show that inequality aversion affects the optimal contracts of both agents. Greater inequality aversion reduces the effort, wage and payoff of agent 1, while the effects on the wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function. However, more inequality aversion unambiguously decreases total output and therefore average labor productivity Nous analysons un environnement de travail à deux tâches avec des individus neutres au risque, mais avec de l’aversion pour l’inégalité. L’effort de l’agent affecté à la tâche 2 est vérifiable, mais ne l’est pas pour l’agent dans la tâche 1. L’agent 1 est donc rémunéré sur la base d’un contrat incitatif, ce qui lui procure une rente qui est source de désutilité pour l’autre agent. L’aversion pour l’inégalité a un effet sur les contrats optimaux des deux agents. Elle réduit l’effort, le salaire et le gain net de l’agent 1, mais a des effets ambigus sur l’agent 2 selon que les niveaux d’effort dans les deux tâches sont des substituts ou des compléments dans la fonction de production de l’entreprise. Cependant, une plus grande aversion pour l’inégalité a toujours pour effet de réduire la production totale et donc la productivité moyenne du travail

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2004s-47.

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Date of creation: 01 Sep 2004
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Handle: RePEc:cir:cirwor:2004s-47

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Keywords: inequality aversion; wage compression; moral hazard; incentives; aversion pour l’inégalité; compression salariale; aléa moral; incitations;

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  1. Englmaier, Florian & Achim Wambach, 2003. "Contracts and Inequity Aversion," Royal Economic Society Annual Conference 2003 74, Royal Economic Society.
  2. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  3. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
  4. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity," Discussion Papers in Economics 14, University of Munich, Department of Economics.
  5. Alesina, Alberto F & Di Tella, Rafael & MacCulloch, Robert, 2001. "Inequality and Happiness: Are Europeans and Americans Different?," CEPR Discussion Papers 2877, C.E.P.R. Discussion Papers.
  6. Dominique Demougin & Claude Fluet, 2003. "Group vs. Individual Performance Pay When Workers Are Envious," Cahiers de recherche 0318, CIRPEE.
  7. 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, vol. 114(1), pages 83-116, February.
  8. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
  9. Demougin, Dominique M. & Bental, Benjamin, 2004. "Incentive Contracts and Total Factor Productivity," Papers 2004,41, Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE).
  10. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
  11. 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).
  12. 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.
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