Output and Wages with Inequality Averse Agents
EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Quebec at Montreal (UQAM) - Department of Economics
Canadian Journal of Economics, Vol. 39, No. 2, pp. 399-413, May 2006
We analyse a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm`s output function.
Number of Pages in PDF File: 15Accepted Paper Series
Date posted: May 8, 2006
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