Fairness Concerns in Heterogeneous Teams: Utility, Reward, and Income

42 Pages Posted: 10 Jul 2023 Last revised: 19 Dec 2023

See all articles by Lin Chen

Lin Chen

INSEAD - Technology and Operations Management

Antoine Désir

INSEAD

Guillaume Roels

INSEAD - Technology and Operations Management

Date Written: December 18, 2023

Abstract

Problem Definition: In homogeneous teams, stimulating inequality aversion among agents is a silver bullet: it leads to higher output while being fair, on all possible dimensions of fairness: utility, reward, and income. Is this result still true in heterogeneous teams when agents might respond differently to incentives?
Methodology/Results: We consider a principal two-agent model in which agents of different abilities are inequality-averse between each other, on one of the following three types of fairness consideration: utility, reward, and income. We analytically show that whether inequality aversion benefits the principal depends on the type of fairness consideration and the degree of agent heterogeneity. Specifically, we find that stimulating utility fairness does not benefit the principal and gives rise to inequalities when the agents are highly heterogeneous; but that it does benefit the principal without creating inequalities when agents are only moderately heterogeneous. Stimulating reward fairness wins on both fronts: It always benefits the principal
and results in no inequalities. Stimulating income fairness hurts potentially on both fronts: It always lowers the principal’s payoff and inequalities may arise.
Managerial Implications: Our research indicates that stimulating inequality aversion (e.g., through performance and pay transparency) can backfire under the wrong type of fairness consideration and/or if the team is too heterogeneous. In general, stimulating inequality aversion when workers compare their rewards is a safer bet than when they compare their utilities; and it should be avoided when they compare their incomes.

Keywords: Fairness, Principal-agent, Teams, Moral Hazard, Inequality Aversion, Heterogeneity, Pay Transparency

Suggested Citation

Chen, Lin and Désir, Antoine and Roels, Guillaume, Fairness Concerns in Heterogeneous Teams: Utility, Reward, and Income (December 18, 2023). INSEAD Working Paper No. 2023/72/TOM, Available at SSRN: https://ssrn.com/abstract=4503491 or http://dx.doi.org/10.2139/ssrn.4503491

Lin Chen

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Antoine Désir

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Guillaume Roels (Contact Author)

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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