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Contracts and Inequity Aversion

  • Florian Englmaier
  • Achim Wambach

Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be ”too” complete. Along with these key insights we derive a couple of further results.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-11/cesifo_wp809.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 809.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_809
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  1. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  2. H. Peyton Young, 1996. "The Economics of Convention," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 105-122, Spring.
  3. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  4. Selten, Reinhard, 1998. "Features of experimentally observed bounded rationality," European Economic Review, Elsevier, vol. 42(3-5), pages 413-436, May.
  5. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  6. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
  7. H. Peyton Young & Mary A. Burke, 2001. "Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture," American Economic Review, American Economic Association, vol. 91(3), pages 559-573, June.
  8. Mirrlees, J A, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 3-21, January.
  9. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
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