Inequity aversion and team incentives

Pedro Rey-Biel

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66 Citations (Scopus)


We study optimal contracts in a simple model where employees are averse to inequity, as modeled by Fehr and Schmidt (1999). 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. Such contracts resemble team and relative performance contracts. We derive conditions for inequity aversion to be in itself a reason to form work teams of distributionally concerned employees, even in situations in which effort is contractible. © 2008 the editors of the Scandinavian Journal of Economics.
Original languageEnglish
Pages (from-to)297-320
JournalScandinavian Journal of Economics
Publication statusPublished - 1 Jun 2008


  • Behavioral contract theory
  • Inequity aversion
  • Team incentives


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