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Inequity aversion and team incentives

  • Pedro Rey Biel

    (University College London)

We study optimal contracts when employees are averse to inequity as modelled by Fehr and Schmidt (1999). A ''selfish'' employer can profitably exploit preferences for equity among his employees by offering contracts which create maximum inequity off-equilibrium and thus, leave employees feeling envy or guilt when they do not produce the optimal output level. We show how the optimal contract is designed such that the subgame played by the employees is dominance solvable, and thus, a unique optimal level of production is implemented. We also discuss conditions for inequity aversion to affect the optimal output choice. Similar results are obtained for other types of distributional preferences such status-seeking or efficiency concerns.

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Paper provided by EconWPA in its series Microeconomics with number 0407009.

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Length: 30 pages
Date of creation: 16 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpmi:0407009
Note: Type of Document - pdf; pages: 30
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