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Saturday, July 11, 2020 | History

4 edition of Optimal incentive contracts under inequity aversion found in the catalog.

Optimal incentive contracts under inequity aversion

Florian Englmaier

Optimal incentive contracts under inequity aversion

by Florian Englmaier

  • 6 Want to read
  • 25 Currently reading

Published by IZA in Bonn, Germany .
Written in English

    Subjects:
  • Contracts -- Mathematical models.

  • Edition Notes

    Statementby Florian Englmaier, Achim Wambach.
    SeriesDiscussion paper ;, no. 1643, Discussion paper (Forschungsinstitut zur Zukunft der Arbeit : Online) ;, no. 1643
    ContributionsWambach, Achim.
    Classifications
    LC ClassificationsHD5701
    The Physical Object
    FormatElectronic resource
    ID Numbers
    Open LibraryOL3479044M
    LC Control Number2005619349

    Inequity Aversion and Team Incentives," mimeo, (). Interdependent Preferences and the Competitive Wage Structure,". Inequity aversion has been studied through experimental games, particularly dictator, ultimatum, and trust games. The concept has been applied in various domains, including business and marketing, such as research on customer responses to exclusive price promotions (Barone & Tirthankar, )) and “pay what you want” pricing (e.g. Regner.

      Florian Englmaier and Achim Wambach, Optimal incentive contracts under inequity aversion, Games and Economic Behavior, 69, 2, (), (). Ex ante incentive contracts serve as a disagreement point in the renegotiation process, thus affecting ex post payoffs. Given an ex ante incentive contract, the manager chooses an optimal effort level anticipating how the contract will be renegotiated ex post. The supervisor designs an optimal ex ante incentive contract taking into account the.

    Social incentives in other domains, for instance charitable giving or con- sumers’ choices, or laboratory tests of social preferences are besides the scope of this review. Section 3 reviews the evidence from contexts where the social group is made of peers, both. inequity aversion on moral hazard and show that under interdependent contracts, team or relative performance contracts, the principal can exploit the agent’s ‘inequity aversion’ to create optimal contracts. Furthermore, others like Bolton and Ockenfels () explore the idea of average wage comparisons within an optimal contracts setting.


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Optimal incentive contracts under inequity aversion by Florian Englmaier Download PDF EPUB FB2

The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules.

The sufficient statistics result is by: Optimal incentive contracts under inequity aversion * Florian Englmaiera.*, Achim Wambach b • University of Munich, Ludwigstr, 28 11/ VG, D Munich, Germany b University of Cologne, Albertus-Magnus-Platz, D Cologne, Germany ARTICLE JEL classification: D23 D63 j31 j   The model analyzes how loss aversion and inequity aversion affect the wage structure in optimal contract design.

The results demonstrate that the presence of loss aversion would lead to a set of rising wage levels and that range of wage levels is wider if a principal is more loss by: 7. Pavlov, Katok, and Zhang: Optimal Contract Under Asymmetric Information About Inequity A version 21 Ho, T.-H., Su, X. and W u, Y.

(), ‘Distributional and Peer-Induced F airness in Supply. 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 by: The optimal contract for multiple agents showing jealousy, which is one side of inequity aversion, is analyzed in and, while [15,16,17,18,19] and studied the incentive contract when agents exhibit.

The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules.

The sufficient statistics result is violated. Optimal incentive contracts under inequity aversion We analyze the classic moral hazard problem with the additional assumption that agents are inequity averse.

The presence of inequity aversion alters the structure of optimal contracts. When the concern for equity becomes more important, there is convergence towards linear sharing rules. The optimal contract under relatively weak inequity aversion is found to be the relative joint contract, by which payment to each independent agent increases with his own output and others’ and agents with higher output will be paid more, while what under strong, even very strong.

2Pavlov, Katok, and Zhang: Optimal Contract Under Asymmetric Information About Inequity Aversion paper, Spengler () demonstrates this under wholesale pricing.

To ensure that incentives in a supply chain are aligned with the objective of the overall pro t maximization, various coordinating. Optimal incentive contracts when workers envy their bosses. Journal of Law, Economics and Organization 24 (1), Englmaier, F., Wambach, A., Optimal incentive contracts under inequity aversion.

Games and Economic Behavior 69 (2), Abstract We study optimal contracts in a simple model where employees are averse to inequity, as modeled by Fehr and Schmidt ().

A “selfish” employer can profitably exploit envy or guilt by offering contracts which create inequity off‐equilibrium, i.e., when employees do not meet his demands.

Contracts and Inequity Aversion 8 Proposition 1 If both agent and principal are risk neutral and the agent exhibits inequity aversion, the First Best contract is unique and linear with slope 1/ The intuition for this result is obvious.

The principal wants to hold the agent down to her outside option and to extract as much rent as possible. the agent’s effort, they cannot be part of a court-enforceable (or explicit) incentive contract.

Employment relationships are, however, usually long-term. Then non-verifiable performance measures can be used for the provision of incentives in so-called rela-tional (or implicit) contracts, which exhibit realistic features of real-world incentive. Human studies. Inequity aversion research on humans mostly occurs in the discipline of economics though it is also studied in sociology.

Research on inequity aversion began in when studies suggested that humans are sensitive to inequities in favor of as well as those against them, and that some people attempt overcompensation when they feel "guilty" or unhappy to have received an.

Downloadable. We study optimal contracts in a simple model where employees are averse to inequity as modelled by Fehr and Schmidt ().

A "selfish" employer can profitably exploit such preferences among its employees by offering contracts which create inequity off-equilibrium and thus, they would leave employees feeling envy or guilt when they do not meet the employer's demands.

Downloadable. Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts.

Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these. Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts Sabrina Teyssiery December Abstract When only group performance is observable, incentives depend on the distribution of payments between group members.

This distribution di ers between rms. Furthermore, in a general journal like the Quarterly Journal of Economics, one might expect that proponents of a new theory of human behavior to some extent would dwell on questions regarding social efficiency and individual rationality, for example by discussing the socially optimal degree of inequity aversion, or perhaps analyze under what.

Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design. Optimal Contracting with Subjective Evaluation. Optimal Incentive Contracts Under Inequity Aversion. Output and Wages with Inequality Averse Agents.

Performance Appraisal: An Organizational Perspective, Bosten: Allyn. Under inequality aversion, this feature is in line with the literature, where envy is typically assumed to be the stronger emotion compared to empathy (see, e.g., Fehr and Schmidt At the analytical level we derive some results that characterize the optimal incentive contracts and partial-equilibrium impacts of variations in the intensity.Inequity aversion is a special form of other regarding preferences and captures many features of reciprocal behavior, an apparently robust pattern in human nature.

Using this concept we analyze the Moral Hazard problem and derive several results which differ from conventional contract theory.

Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal. We are studying in this article an interplay between workers in organizations under the assumption that workers exhibit behavioral biases: envy, jealousy, or admiration toward the other coworkers’ compensation.

We assume workers care about their relative position, and we study the impact of this assumption on their efforts and on their optimal incentive contracts.