Optimal Group Incentives with Social Preferences and Self-Selection
In this paper, we analyze group incentives when a proportion of agents feel in- equity aversion as defined by Fehr and Schmidt (1999). We define a separating equilibrium that explains the co-existence of multiple payment schemes in firms. We show that a tournament provides strong incentives to agents who only care about their own payo¤ but that it is not efficient when agents are inequity averse. In fact, inequity averse agents are attracted by a revenue-sharing scheme in which the joint production is equally distributed, under the constraint that selfish agents have no incentive to join the revenue sharing organization. If the market is perfectly flexi- ble, this separating equilibrium induces a high effort level for both types of agents. Pareto gains are achieved by offering organizational choice to agents and the optimal contract is thus to propose both payment schemes to agents and to allow them to self-select into the different payment schemes.
Incentives, performance pay, revenue sharing, self-selection, social preferences, tournament
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.