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Inequity Aversion and Team Incentives

  • Pedro Rey-Biel

We study optimal contracts in a simple model where employees are averse to inequity, as modeled by Fehr and Schmidt (1999) . A "selfish" employer can profitably exploit "envy" or "guilt" by offering contracts which create inequity off-equilibrium, i.e., when employees do not meet his demands. Such contracts resemble "team" and "relative performance" contracts. We derive conditions for inequity aversion to be in itself a reason to form work teams of distributionally concerned employees, even in situations in which effort is contractible. Copyright © The editors of the "Scandinavian Journal of Economics" 2008 .

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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 110 (2008)
Issue (Month): 2 (06)
Pages: 297-320

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Handle: RePEc:bla:scandj:v:110:y:2008:i:2:p:297-320
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