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Inequity Aversion and Team Incentives

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Listed author(s):
  • Pedro Rey-Biel

Abstract

We study optimal contracts when employees are averse to inequity as modelled by Fehr and Schmidt (1999). A ''selfish'' employer can profitably exploit preferences for equity among his employees by offering contracts which create maximum inequity off-equilibrium and thus, leave employees feeling envy or guilt when they do not produce the optimal output level. We show how the optimal contract is designed such that the subgame played by the employees is dominance solvable, and thus, a unique optimal level of production is implemented. We also discuss conditions for inequity aversion to affect the optimal output choice. Similar results are obtained for other types of distributional preferences such status-seeking or efficiency concerns.

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

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Handle: RePEc:bge:wpaper:319
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Keywords: Inequity aversion; team incentives; behavioral contract theory;

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Find related papers by JEL classification:
  • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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