Optimal Incentive Contracts under Inequity Aversion

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Optimal Incentive Contracts under Inequity Aversion

Author Info

Florian Englmaier () (University of Munich and IZA Bonn)
Achim Wambach (University of Erlangen-Nuremberg)

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Abstract

We analyze the Moral Hazard problem, assuming that agents are inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. We find: First, inequity aversion alters the structure of optimal contracts. Second, there is a strong tendency towards linear sharing rules. Third, it delivers a simple rationale for team based incentives in many environments. Fourth, the Sufficient Statistics Result is violated. Dependent on the environment, optimal contracts may be either overdetermined or incomplete.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1643.

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Length: 47 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1643

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-07-03 (All new papers)

Cited by:
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Robert Dur & Hein Roelfsema, 2006. "Social Exchange and Common Agency in Organizations," Working Papers 06-11, Utrecht School of Economics. [Downloadable!]
Other versions:
- Robert Dur & Hein Roelfsema, 2007. "Social Exchange and Common Agency in Organizations," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
- Robert Dur & Hein Roelfsema, 2006. "Social Exchange and Common Agency in Organizations," Tinbergen Institute Discussion Papers 06-111/1, Tinbergen Institute, revised 15 Oct 2008. [Downloadable!]
Björn Bartling & Ferdinand von Siemens, 2006. "The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents," Discussion Papers 115, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
Grund, Christian & Przemeck, Judith, 2008. "Subjective Performance Evaluation and Inequality Aversion," IZA Discussion Papers 3382, Institute for the Study of Labor (IZA). [Downloadable!]
Junichiro Ishida, 2006. "Contracting with Self-Esteem Concerns," OSIPP Discussion Paper 06E004, Osaka School of International Public Policy, Osaka University.
Other versions:
- Junichiro Ishida, 2006. "Contracting with Self-Esteem Concerns," OSIPP Discussion Paper 06E004Rev., Osaka School of International Public Policy, Osaka University, revised Nov 2006. [Downloadable!]
Santos-Pinto, Luís, 2006. "Reciprocity, inequity-aversion, and oligopolistic competition," MPRA Paper 3143, University Library of Munich, Germany, revised 14 Apr 2007. [Downloadable!]
Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers bgse17_2008, University of Bonn, Germany. [Downloadable!]
Alexander K. Koch & Eloïc Peyrache, 2008. "Aligning Ambition and Incentives," Economics Working Papers 2008-16, School of Economics and Management, University of Aarhus. [Downloadable!]
Other versions:
- Koch, Alexander K. & Peyrache, Eloïc, 2005. "Aligning Ambition and Incentives," IZA Discussion Papers 1527, Institute for the Study of Labor (IZA). [Downloadable!]
- Alexander K. Koch & Eloic Peyrache, 2005. "Aligning Ambition and Incentives," Royal Holloway, University of London: Discussion Papers in Economics 05/03, Department of Economics, Royal Holloway University of London, revised Mar 2005. [Downloadable!]
Küpper, Hans-Ulrich & Sandner, Kai, 2008. "Differences in Social Preferences - Are They Profitable for the Firm?," Discussion Papers in Business Administration 2122, University of Munich, Munich School of Management. [Downloadable!]
Florian Englmaier & Stephen Leider, 2008. "Contractual and Organizational Structure with Reciprocal Agents," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Bartling, Björn & Siemens, Ferdinand von, 2006. "The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents," Discussion Papers in Economics 913, University of Munich, Department of Economics. [Downloadable!]

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