Contracts and Inequity Aversion

26 Pages Posted: 10 Dec 2002

See all articles by Florian Englmaier

Florian Englmaier

Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Achim Wambach

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: November 2002

Abstract

Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be "too" complete. Along with these key insights we derive a couple of further results.

Keywords: Contract Theory, Linear Contracts, Incentives, Sufficient Statistics Result, Inequity Aversion, Fairness

JEL Classification: D63, J3, M12, Z13

Suggested Citation

Englmaier, Florian and Wambach, Achim, Contracts and Inequity Aversion (November 2002). CESifo Working Paper Series No. 809, Available at SSRN: https://ssrn.com/abstract=358325

Florian Englmaier (Contact Author)

Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Achim Wambach

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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