Inequity Aversion and Team Incentives

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.     

Inequity-averse preferences in general equilibrium

We study the stability with respect to the introduction of opportunity-based inequity aversion à la Dufwenberg et al. (2011) of three welfare properties satisfied by competitive equilibria in self-regarding economies: (i) Pareto efficiency may not be a stable property; (ii) undomination with respect to income redistribution is a stable property whenever the marginal indirect utility of income has no extreme variations; and (iii) generically (endowment-wise) market-constrained efficiency is a stable property.     

Trust and trustworthiness across different age groups

We examine the degree of trust and trustworthiness in an experimental trust game with 662 participants from six different age groups, ranging from 8-year-olds to retired persons. Although both trust and trustworthiness have been identified as fundamental pillars for efficient economic interactions, economic research has devoted little attention to measuring their strength in different age groups. In our experiment subjects interact with members of the same age group. We find that trust increases almost linearly from early childhood to early adulthood, but stays rather constant within different adult age groups. Trustworthiness prevails in all age groups.     

On the beliefs off the path: Equilibrium refinement due to quantal response and level-k

The extensive form game we study has multiple perfect equilibria, but it has a unique limiting logit equilibrium (QRE) and a unique level-k prediction as k approaches infinity. The convergence paths of QRE and level-k are different, but they converge to the same limit point. We analyze whether subjects adapt beliefs when gaining experience, and if so whether they take the QRE or the level-k learning path. We estimate transitions between level-k and QRE belief rules using Markov-switching rule learning models. The analysis reveals that subjects take the level-k learning path and that they advance gradually, switching from level 1 to 2, from level 2 to equilibrium, and reverting to level 1 after observing opponents deviating from equilibrium. The steady state therefore contains a mixture of behavioral rules: levels 0, 1, 2, and equilibrium with weights of 2.9%, 16.6%, 37.9%, and 42.6%, respectively.     

Team production with inequity-averse agents

This paper analyzes the efficiency of team production when risk-neutral agents exhibit other-regarding preferences. It is shown that full efficiency can be sustained as an equilibrium of a budget-balancing mechanism that punishes some randomly chosen agents if output falls short of the efficient level but distributes output equally otherwise. The result depends on agents being sufficiently inequity-averse.