Research Summary
Research Summary
'Optimal Incentive Contracts under Inequity Aversion' (with Achim Wambach) ), 2005
Description
We analyze the Moral Hazard problem, assuming that the agent is inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than these standard results. Our key findings are: Inequity aversion alters the structure of optimal contracts. There is a strong tendency towards linear sharing rules. Inequity aversion delivers a simple rationale for team based incentives in many environments. The Sufficient Statistics result is violated. Dependent on the environment, optimal contracts may be either overdetermined or incomplete. Finally, inequity aversion gives scope for a new incentive instrument.