Optimal Incentive Contracts under Inequity Aversion

Englmaier, Florian and Wambach, Achim (2005): Optimal Incentive Contracts under Inequity Aversion. IZA Discussion Paper Series, 1643

Abstract

We analyze the Moral Hazard problem, assuming that agents are inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. We find: First, inequity aversion alters the structure of optimal contracts. Second, there is a strong tendency towards linear sharing rules. Third, it delivers a simple rationale for team based incentives in many environments. Fourth, the Sufficient Statistics Result is violated. Dependent on the environment, optimal contracts may be either overdetermined or incomplete.

• Item Type: Paper
• Keywords: inequity aversion; sufficient statistics result; incentives; linear contracts; contract theory; inco
• Faculties: Economics > Chairs; Economics > Chairs > Seminar for Organizational Economics
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D23, D63, J31, J33, M12, Z13
• Language: English