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Output and Wages with Inequality Averse Agents

Author

Listed:
  • Dominique Demougin
  • Claude-Denys Fluet
  • Carsten Helm

Abstract

We analyze a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract which, due to his wealth constraint, leads to a rent that the other agent resents. We show that inequality aversion affects the optimal contracts of both agents. Greater inequality aversion reduces the effort, wage and payoff of agent 1, while the effects on the wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function. However, more inequality aversion unambiguously decreases total output and therefore average labor productivity Nous analysons un environnement de travail à deux tâches avec des individus neutres au risque, mais avec de l'aversion pour l'inégalité. L'effort de l'agent affecté à la tâche 2 est vérifiable, mais ne l'est pas pour l'agent dans la tâche 1. L'agent 1 est donc rémunéré sur la base d'un contrat incitatif, ce qui lui procure une rente qui est source de désutilité pour l'autre agent. L'aversion pour l'inégalité a un effet sur les contrats optimaux des deux agents. Elle réduit l'effort, le salaire et le gain net de l'agent 1, mais a des effets ambigus sur l'agent 2 selon que les niveaux d'effort dans les deux tâches sont des substituts ou des compléments dans la fonction de production de l'entreprise. Cependant, une plus grande aversion pour l'inégalité a toujours pour effet de réduire la production totale et donc la productivité moyenne du travail

Suggested Citation

  • Dominique Demougin & Claude-Denys Fluet & Carsten Helm, 2004. "Output and Wages with Inequality Averse Agents," CIRANO Working Papers 2004s-47, CIRANO.
  • Handle: RePEc:cir:cirwor:2004s-47
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    References listed on IDEAS

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    1. Hideshi Itoh, 2004. "Moral Hazard and Other‐Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45, March.
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    More about this item

    Keywords

    inequality aversion; wage compression; moral hazard; incentives; aversion pour l'inégalité; compression salariale; aléa moral; incitations;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D2 - Microeconomics - - Production and Organizations
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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