Output and Wages with Inequality Averse Agents

15 Pages Posted: 8 May 2006

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

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Abstract

We analyse 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 that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm`s output function.

Suggested Citation

Demougin, Dominique and Fluet, Claude-Denys and Helm, Carsten, Output and Wages with Inequality Averse Agents. Canadian Journal of Economics, Vol. 39, No. 2, pp. 399-413, May 2006, Available at SSRN: https://ssrn.com/abstract=899637 or http://dx.doi.org/10.1111/j.0008-4085.2006.00352.x

Dominique Demougin

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 (Contact Author)

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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