Inequity Aversion in Tournaments

Abstract

We consider the cost of providing incentives using tournaments when workers are inequity averse and performance evaluation is costly. The principal never benefits from empathy to align incentives in a moral hazard framework between the workers, but he may benefit from their propensity for envy depending on the costs of assessing performance. More envious employees are preferred when the costs are high, less envious ones when they are low.

Keywords: Tournaments, inequity aversion, envy, incentives, performance

JEL Classification: D8, J4