Inequity-averse agents’ deserved concerns under the linear contract: a social network setting

We model how inequity-averse agents’ deserved concerns generated by a social network setting impact on their behaviors and interactions under linear contract. Based on self-perception in the network, the agent will have deserved perception on the two essential elements of linear contract, i.e., deserved fixed wage and deserved output sharing, and thus generate deserved pay gap. By incorporating deserved pay gap into pay comparisons, we obtain three main findings: (1) perceived relative incentive fairness or inequity over the entire networks decides agents’ effort competition. When agents perceive over-incentivized over the networks, the heterogeneity in the network will stimulate agents to compete. While in an overall under-incentivized network, the agent tends to compete with homogenous ones, and will instead reduce effort with increasing heterogeneity in the network; (2) the normal conclusion that inequity aversion can enhance agent effort will be reversed when the agent perceives under-incentivized; and (3) wage compression remains valid, yet we provide a definitive range for the optimal incentive level.