Biel, P.R.; (2002) Inequity aversion and team incentives. (ELSE Working Papers 59). ESRC Centre for Economic Learning and Social Evolution: London, UK.

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Abstract

We study how the optimal contract in team production is affected when employees are averse to inequity in the sense described by Fehr and Schmidt (1999). By designing a reward scheme that creates inequity of the desired equilibrium, the employer can induce employees to perform effort at a lower total wage cost than when they are not inequity averse. We also show that the optimal output choice might change when employees are inequity averse. Finally, we show that an employer can gain, and never lose, by designing a contract that accounts for inequity aversion, even if employees have standard preferences.

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