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Output and Wages with Inequality Averse Agents

Dominique Demougin, Claude Fluet and Carsten Helm
The Canadian Journal of Economics / Revue canadienne d'Economique
Vol. 39, No. 2 (May, 2006), pp. 399-413
Published by: Wiley on behalf of the Canadian Economics Association
Stable URL: http://www.jstor.org/stable/3696161
Page Count: 15
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Output and Wages with Inequality Averse Agents
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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.

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