Output and wages with inequality averse agents

We analyse a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract that, owing to his wealth constraint, leads to a rent that the other agent...

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Bibliographic Details
Published in:The Canadian journal of economics 2006-05, Vol.39 (2), p.399-413
Main Authors: Demougin, Dominique, Fluet, Claude, Helm, Carsten
Format: Article
Language:English
Subjects:
Agency theory
Business structures
Contract incentives
Corporate culture
Economic analysis
Economic models
Economic theory
Envy
Fairness
Growth models
Incentive pay
Income inequality
Inequality
Limited liability
Productivity
Risk
Studies
Wage rates
Wages
Wages & salaries
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Summary:We analyse a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function.
ISSN:0008-4085
1540-5982
DOI:10.1111/j.0008-4085.2006.00352.x