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Inequity Aversion and Team Incentives

  • Pedro Rey-Biel

We study optimal contracts in a simple model where employees are averse to inequity as modelled 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.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 319.

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Date of creation: May 2007
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Handle: RePEc:bge:wpaper:319
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