Optimal incentive contracts under inequity aversion

We analyze the classic moral hazard problem with the additional assumption that agents are inequity averse. The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules. The sufficie...

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Bibliographic Details
Published in:Games and economic behavior 2010-07, Vol.69 (2), p.312-328
Main Authors: Englmaier, Florian, Wambach, Achim
Format: Article
Language:English
Subjects:
Contract theory
Contract theory Linear contracts Incentives Sufficient statistics result Inequity aversion Incomplete contracts
Contracts
Economic incentives
Game theory
Incentives
Income inequality
Incomplete contracts
Inequality
Inequity aversion
Linear contracts
Moral hazard
Preferences
Principal-agent theory
Statistical decision
Studies
Sufficient statistics result
Wage rates
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Summary:We analyze the classic moral hazard problem with the additional assumption that agents are inequity averse. The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules. The sufficient statistics result is violated. Depending on the environment, contracts may be either overdetermined, i.e. include non-informative performance measures, or incomplete, i.e. neglect informative performance measures. Finally, our model delivers a simple rationale for team based incentives, implying wage compression.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2009.12.007