Optimal Incentive Contracts Under Inequity Aversion

47 Pages Posted: 18 Jul 2005

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: June 2005

Abstract

We analyze the Moral Hazard problem, assuming that agents are inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. We find: First, inequity aversion alters the structure of optimal contracts. Second, there is a strong tendency towards linear sharing rules. Third, it delivers a simple rationale for team based incentives in many environments. Fourth, the Sufficient Statistics Result is violated. Dependent on the environment, optimal contracts may be either overdetermined or incomplete.

Keywords: contract theory, linear contracts, incentives, sufficient statistics result, inequity aversion, incomplete contracts

JEL Classification: D23, D63, J31, J33, M12, Z13

Suggested Citation

Englmaier, Florian and Wambach, Achim, Optimal Incentive Contracts Under Inequity Aversion (June 2005). IZA Discussion Paper No. 1643, Available at SSRN: https://ssrn.com/abstract=756409

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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