Inequality aversion in long-term contracts

Cato, Susumu and Ebina, Takeshi (2014): Inequality aversion in long-term contracts.

Abstract

This paper examines a two-period moral hazard model with an inequality-averse agent. We show how the agent's past performance will help the principal to relax incentive compatibility constraints and how the existence of an inequality aversion of the agent affects a level of wage in each period in a long-term contract. In particular, we focus on the performance in period 1 on the level of wage in period 2. We show that the agent's wage in period 2 depends on performance in periods 1 and 2. This implies that the long-term relationship creates the opportunity for intertemporal risk and inequality sharing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Moral hazard, Inequality aversion, Behavioral contract theory, Distribution
• Subjects: D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production

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