Inequity Aversion and Team Incentives

24 Pages Posted: 22 Jul 2008

See all articles by Pedro Rey-Biel

Pedro Rey-Biel

Autonomous University of Barcelona

Date Written: 2007-12


We study optimal contracts in a simple model where employees are averse to inequity, as modeled by Fehr and Schmidt (1999). A selfish employer can profitably exploit envy or guilt by offering contracts which create inequity off-equilibrium, i.e., when employees do not meet his demands. Such contracts resemble team and relative performance contracts. We derive conditions for inequity aversion to be in itself a reason to form work teams of distributionally concerned employees, even in situations in which effort is contractible.

Suggested Citation

Rey-Biel, Pedro, Inequity Aversion and Team Incentives (2007-12). Scandinavian Journal of Economics, Vol. 110, Issue 2, pp. 297-320, June 2008, Available at SSRN: or

Pedro Rey-Biel (Contact Author)

Autonomous University of Barcelona

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193

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