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Optimal incentive contracts under inequity aversion

  • Englmaier, Florian
  • Wambach, Achim

We analyze the classic moral hazard problem with the additional assumption that agents are inequity averse. The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules. The sufficient statistics result is violated. Depending on the environment, contracts may be either overdetermined, i.e. include non-informative performance measures, or incomplete, i.e. neglect informative performance measures. Finally, our model delivers a simple rationale for team based incentives, implying wage compression.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 69 (2010)
Issue (Month): 2 (July)
Pages: 312-328

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Handle: RePEc:eee:gamebe:v:69:y:2010:i:2:p:312-328
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