Inequity Aversion and Team Incentives
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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Volume (Year): 110 (2008)
Issue (Month): 2 (06)
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