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Inequity Aversion and Team Incentives

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  • Pedro Rey‐Biel

Abstract

We study optimal contracts in a simple model where employees are averse to inequity, as modeled by Fehr and Schmidt (1999). A “selfish” employer can profitably exploit envy or guilt by offering contracts which create inequity off‐equilibrium, i.e., when employees do not meet his demands. Such contracts resemble team and relative performance contracts. We derive conditions for inequity aversion to be in itself a reason to form work teams of distributionally concerned employees, even in situations in which effort is contractible.

Suggested Citation

  • Pedro Rey‐Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, June.
    • Handle: RePEc:bla:scandj:v:110:y:2008:i:2:p:297-320
    DOI: 10.1111/j.1467-9442.2008.00540.x
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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