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Fairness, Adverse Selection, and Employment Contracts

  • Siemens, Ferdinand von
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    This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both types are to be employed, thereby rendering the optimal employment contracts discontinuous in the fraction of fair-minded workers. As a result, fairness might influence the employment contracts of all workers although only some are fair-minded, and identical firms facing very similar pools of workers might employ very different remuneration schemes.

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    File URL: http://epub.ub.uni-muenchen.de/13492/1/58.pdf
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    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 58.

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    Date of creation: Jul 2005
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    Handle: RePEc:trf:wpaper:58
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    1. Dominique Demougin & Claude Fluet & Carsten Helm, 2004. "Output and Wages with Inequality Averse Agents," Cahiers de recherche 0419, CIRPEE.
    2. Gary E Bolton & Axel Ockenfels, 1997. "A Theory of Equity, Reciprocity, and Competition," Levine's Working Paper Archive 1889, David K. Levine.
    3. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August.
    4. Ramarao Desiraju & David E. M. Sappington, 2007. "Equity and Adverse Selection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 285-318, 06.
    5. Englmaier, Florian & Achim Wambach, 2003. "Contracts and Inequity Aversion," Royal Economic Society Annual Conference 2003 74, Royal Economic Society.
    6. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
    7. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-71, September.
    8. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
    9. Alvin E. Roth & V. Prasnikar & M. Okuno-Fujiwara & S. Zamir, 1998. "Bargaining and market behavior in Jerusalem, Liubljana, Pittsburgh and Tokyo: an experimental study," Levine's Working Paper Archive 344, David K. Levine.
    10. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Blinder, Alan S & Choi, Don H, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1003-15, November.
    12. Campbell, Carl M, III & Kamlani, Kunal S, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 759-89, August.
    13. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
    14. Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May.
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