Fairness, Adverse Selection, and Employment Contracts

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Fairness, Adverse Selection, and Employment Contracts

Author Info

Ferdinand von Siemens (University of Munich, ferdinand.vonsiemens@lrz.uni-muenchen.de)

Abstract

This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both types are to be employed, thereby rendering the optimal employment contracts discontinuous in the fraction of fair-minded workers. As a result, fairness might influence the employment contracts of all workers although only some are fair-minded, and identical firms facing very similar pools of workers might employ very different remuneration schemes.

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Publisher Info
Paper provided by 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 in its series Discussion Papers with number 58.

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Date of creation: Jul 2005
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Handle: RePEc:trf:wpaper:58

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Find related papers by JEL classification:
C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-10-29 (All new papers)
NEP-SOC-2005-10-29 (Social Norms & Social Capital)

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Other versions:
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