Output and Wages with Inequality Averse Agents

CIRPEE Working Paper No. 04-19

15 Pages Posted: 6 Sep 2004

See all articles by Dominique Demougin

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Claude Fluet

Université Laval

Carsten Helm

University of Oldenburg - Public Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2004

Abstract

We analyze 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 which, due to his wealth constraint, leads to a rent that the other agent resents. We show that inequality aversion affects the optimal contracts of both agents. Greater inequality aversion reduces the effort, wage and payoff of agent 1, while the effects on the wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function. However, more inequality aversion unambiguously decreases total output and therefore average labor productivity.

Keywords: Inequality aversion, wage compression, moral hazard, incentives

JEL Classification: D63, D2, J3, L2

Suggested Citation

Demougin, Dominique and Fluet, Claude-Denys and Helm, Carsten, Output and Wages with Inequality Averse Agents (July 2004). CIRPEE Working Paper No. 04-19, Available at SSRN: https://ssrn.com/abstract=585776 or http://dx.doi.org/10.2139/ssrn.585776

Dominique Demougin (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

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

Poschinger Str. 5
Muenchen, 81679
Germany

Claude-Denys Fluet

Université Laval ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada
1-418-656-2131, ext 3290 (Phone)

Carsten Helm

University of Oldenburg - Public Economics ( email )

Department of Economics and Law
Oldenburg, 26111
Germany
+49 441 798-4113 (Phone)

HOME PAGE: http://www.fiwi.uni-oldenburg.de/

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