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Output and Wages with Inequality Averse Agents

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Author Info
Dominique Demougin
Claude Fluet
Carsten Helm

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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.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0419.

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Date of creation: 2004
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Handle: RePEc:lvl:lacicr:0419

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Related research
Keywords: Inequality aversion; wage compression; moral hazard; incentives;

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Find related papers by JEL classification:
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
D2 - Microeconomics - - Production and Organizations
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45. [Downloadable!] (restricted)
  2. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity," Discussion Papers in Economics 14, University of Munich, Department of Economics. [Downloadable!]
  3. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October. [Downloadable!] (restricted)
  5. Benjamin Bental & Dominique Demougin, 2003. "Incentive Contracts and Total Factor Productivity," Cahiers de recherche 0325, CIRPEE. [Downloadable!]
    Other versions:
  6. 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. [Downloadable!] (restricted)
  7. Ernst Fehr & Klaus M. Schmidt, . "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers iewwp004, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  8. 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.
  9. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn. [Downloadable!] (restricted)
    Other versions:
  10. Dominique Demougin & Claude Fluet, 2003. "Group vs. Individual Performance Pay When Workers Are Envious," Cahiers de recherche 0318, CIRPEE. [Downloadable!]
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  11. Englmaier, Florian & Achim Wambach, 2003. "Contracts and Inequity Aversion," Royal Economic Society Annual Conference 2003 74, Royal Economic Society. [Downloadable!]
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  12. Alesina, Alberto & Di Tella, Rafael & MacCulloch, Robert, 2004. "Inequality and happiness: are Europeans and Americans different?," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 2009-2042, August. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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!]
  2. Ferdinand von Siemens, 2005. "Fairness, Adverse Selection, and Employment Contracts," Discussion Papers 58, 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!]
  3. Siemens, Ferdinand von, 2005. "Fairness, Adverse Selection, and Employment Contracts," Discussion Papers in Economics 669, University of Munich, Department of Economics. [Downloadable!]
  4. Pradeep Dubey & John Geanakoplos, 2009. "Grading Exams: 100, 99, 98,...or A, B, C?," Cowles Foundation Discussion Papers 1710, Cowles Foundation, Yale University. [Downloadable!]
  5. 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!]
  6. Grund, Christian & Przemeck, Judith, 2008. "Subjective Performance Evaluation and Inequality Aversion," IZA Discussion Papers 3382, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Robert Dur & Joeri Sol, 2008. "Social Interaction, Co-Worker Altruism, and Incentives," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Debashis Pal & Arup Bose & David Sappington, 2008. "Asymmetric Treatment of Identical Agents in Teams," University of Cincinnati, Economics Working Papers Series 2008-08, University of Cincinnati, Department of Economics. [Downloadable!]
  9. Bartling, Björn & Siemens, Ferdinand von, 2007. "Equal Sharing Rules in Partnerships," Discussion Papers in Economics 2027, University of Munich, Department of Economics. [Downloadable!]
  10. Pradeep Dubey & John Geanakoplos, 2009. "Grading Exams: 100, 99, 98,... or A, B, C?," Levine's Working Paper Archive 814577000000000361, David K. Levine. [Downloadable!]
  11. 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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This page was last updated on 2009-11-19.


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