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
• Keywords: Fairness; Employment Contracts; Adverse Selection; Screening; Heterogeneity in Organizational Form
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Micro-Economics; Economics > Munich Discussion Papers in Economics > Labor; Economics > Munich Discussion Papers in Economics > Economics of Information; Economics > Munich Discussion Papers in Economics > Behavioral Economics; Economics > Munich Discussion Papers in Economics > Game Theory
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: C70, D21, D42, D63, D82, J31
• Language: English