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Optimal Group Incentives with Social Preferences and Self-Selection

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  • Sabrina Teyssier

    () (GATE CNRS)

Abstract

In this paper, we analyze group incentives when a proportion of agents feel in- equity aversion as defined by Fehr and Schmidt (1999). We define a separating equilibrium that explains the co-existence of multiple payment schemes in firms. We show that a tournament provides strong incentives to agents who only care about their own payo¤ but that it is not efficient when agents are inequity averse. In fact, inequity averse agents are attracted by a revenue-sharing scheme in which the joint production is equally distributed, under the constraint that selfish agents have no incentive to join the revenue sharing organization. If the market is perfectly flexi- ble, this separating equilibrium induces a high effort level for both types of agents. Pareto gains are achieved by offering organizational choice to agents and the optimal contract is thus to propose both payment schemes to agents and to allow them to self-select into the different payment schemes.

Suggested Citation

  • Sabrina Teyssier, 2007. "Optimal Group Incentives with Social Preferences and Self-Selection," Working Papers 0710, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:0710
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    References listed on IDEAS

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    Cited by:

    1. Antonio Cabrales & Raffaele Miniaci & Marco Piovesan & Giovanni Ponti, 2010. "Social Preferences and Strategic Uncertainty: An Experiment on Markets and Contracts," American Economic Review, American Economic Association, vol. 100(5), pages 2261-2278, December.
    2. Sabrina Teyssier, 2008. "Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts," Post-Print halshs-00303727, HAL.
    3. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme MécanismesSélectifs de la Main d'oeuvre : Fondements Théoriques et Estimations Empiriques," Post-Print halshs-00303703, HAL.

    More about this item

    Keywords

    Incentives; performance pay; revenue sharing; self-selection; social preferences; tournament;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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