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Optimal Group Incentives with Social Preferences and Self-Selection

  • Sabrina Teyssier



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.

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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0710.

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Length: 35 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:gat:wpaper:0710
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  1. Urs Fischbacher & Simon Gaechter, 2006. "Heterogeneous social preferences and the dynamics of free riding in public goods," Discussion Papers 2006-01, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
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