Fairness, Adverse Selection, and Employment Contracts

Siemens, Ferdinand von (July 2005): Fairness, Adverse Selection, and Employment Contracts. Discussion Papers in Economics 2005-14

Abstract

This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both types are to be employed, thereby rendering the optimal employment contracts discontinuous in the fraction of fair-minded workers. As a result, fairness might infuence the employment contracts of all workers although only some are fair-minded, and identical firms facing very similar pools of workers might employ very different remuneration schemes.

• Item Type: Paper (Discussion Paper)
• Keywords: Fairness; Employment Contracts; Adverse Selection; Screening; Heterogeneity in Organizational Form
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Micro-Economics; Economics > Discussion Papers in Economics > Labor; Economics > Discussion Papers in Economics > Economics of Information; Economics > Discussion Papers in Economics > Behavioral Economics; Economics > Discussion Papers in Economics > Game Theory
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: C70, D21, D42, D63, D82, J31
• Language: English