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Inequity Aversion and Team Incentives

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  • Pedro Rey-Biel

Abstract

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 .

Suggested Citation

  • Pedro Rey-Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, June.
  • Handle: RePEc:bla:scandj:v:110:y:2008:i:2:p:297-320
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    More about this item

    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

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