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Output and wages with inequality averse agents

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  • Dominique Demougin
  • Claude Fluet
  • Carsten Helm

Abstract

We analyse 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 that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function.

Suggested Citation

  • Dominique Demougin & Claude Fluet & Carsten Helm, 2006. "Output and wages with inequality averse agents," Canadian Journal of Economics, Canadian Economics Association, vol. 39(2), pages 399-413, May.
    • Handle: RePEc:cje:issued:v:39:y:2006:i:2:p:399-413
    DOI: 10.1111/j.0008-4085.2006.00352.x
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    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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