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Output and wages with inequality averse agents

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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. JEL classification: D2, J3

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.0008-4085.2006.00352.x

Affiliations: 1: School of Business and Economics, Humboldt University Berlin 2: CIRPEE, Université du Québec à Montréal 3: Department of Law and Economics, Technical University Darmstadt

Publication date: May 1, 2006

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