Inequity Aversion and Team Incentives


  • Pedro Rey-Biel

    1. Universitat Autònoma de Barcelona, ES-08193 Bellaterra, Barcelona, Spain
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      I am indebted to Tilman Börgers, Dirk Engelmann and Steffen Huck for extensive comments. I am also grateful to Miguel A. Ballester, Ken Binmore, Martin Bøg, Antonio Cabrales, Antoni Calvó, Armin Falk, Dunia López-Pintado, Inés Macho-Stadler, David Pérez-Castrillo, Matthew Rabin, Klaus Schmidt and Joel Sobel for their comments. Financial support from Ministerio de Ciencia y Tecnología (SEJ2006-00538 and Consolider-Ingenio CSD2006-00016) and Generalitat de Catalunya (2005SGR-00836 and Barcelona Economics-Xarxa CREA) is gratefully acknowledged.


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.