We consider the cost of providing incentives through tournaments when workers are inequity averse and performance evaluation is costly. The paper aims at obtaining new theoretical insights by combining the standard moral hazard models of principalagent relationships with theories of other. This feature is captured by the theory of inequity aversion. Indeed, our conception of desert is related to the inequityaversion model of fehr and schmidt 1999, and one of the aims of our paper is to clarify this relationship. In this paper we examine tournaments among inequity averse agents, who dislike disadvantageous inequity envy and advantageous inequity compassion. This paper introduces a model of inequality aversion that captures a preference for equality of exante expected payoff relative to a preference for equality of expost payoff by a single parameter. The results are, for the most part, similar to the results in column 3. By designing a reward scheme that creates inequity o. Based on experimental and field evidence, social scientists commonly assume that human behaviour favours outcomes that are fair, keeping inequality to a minimum since experience suggests that in. Stated and revealed inequality aversion in three subject pools.
We find support that the concept of inequity aversion helps to understand how the relative income situation affects performance in a real competitive environment with real tasks and real incentives. It is wellaccepted that inequity aversion captures the critical feature of humans fairness in decisionmaking fehr and schmidt, 2006. Previous studies have shown that people would like to sacrifice benefits to themselves in order to avoid inequitable outcomes, not only when they receive less than others disadvantageous inequity aversion but also when they receive more advantageous inequity aversion. Inequity aversion and individual behavior in public good. These results suggest that both envy and loss aversion drive behavior in tournaments. An experimental investigation astrid dannenberga, thomas riechmannb, bodo sturma, and carsten vogtc acentre for european economic research zew, mannheim bfaculty of economics and management, university of magdeburg cdepartment of business administration, leipzig university of applied sciences. Allowing for risk aversion introduces a countervailing force.
A problem of inequity aversion models is the fact that there are free parameters. Experimental evidence on inequity aversion and self. A preference foundation for fehr and schmidts model of inequity aversion1 kirsten i. This paper reports data from three subject pools n717 subjects using techniques based on those of loewenstein, et al. Accordingly, the degree of inequality aversion is measured by the amount society is willing to give up in order to achieve a more egalitarian distribution of income. It turns out that inequity averse agents exert higher effort levels than purely self. We analyze the moral hazard problem, assuming that agents are inequity averse.
We provide a replication opportunity for those papers, with two innovations. In a twoplayer tournament, if player i wins, she will have an utility of 2 w i i i e v r r r k a b. This research investigates optimal selling strategies and equilibrium welfare implications in markets with buyer inequity aversion. Inequity aversion and individual behavior in public good games. Normalizes inequity aversion by the number of others otherwise every new player k would decrease is utility unless x k x i selforiented. Second movers who are averse to advantageous inequity freeride less and reciprocate more than do others. Sectioniiistates the hypotheses based on the theoretical models.
Inequality aversion, risk aversion, and social welfare. Understanding when and why people give others the bigger piece of the pie show all authors. The fact that we did not find any significant bold activation in the striatum in response to deviations from equality also sheds light on the neuronal evidence of inequality aversion that was reported in the paper by tricomi et al. They refer us to others because we deliver extraordinary results. The studies supported our main hypothesis that disadvantageous inequity aversion, without advantageous inequity aversion, does not fit peoples folk conception of fairness. The experiment was computerized with the software ztree. Inequity aversion, the negative reaction to unequal treatment, is considered a mechanism for stabilizing cooperative interactions between nonkin group members. We study optimal contracts in a simple model where employees are averse to inequity, as modeled by fehr and schmidt 1999. This paper studies the impact of inequity aversion preferences fehr and schmidt, 1999 in a repeated public goods game. Simply select your manager software from the list below and click on download. Risk aversion in inventory management 830 operationsresearch555,pp. Behavioral responses to inequity in reward distribution. Direct effects are present when a player changes his action to affect disutility caused by inequality.
Optimal incentive contracts under inequity aversion. Finally, we provide a behavioral foundation of the model. Inequity and risk aversion in sequential public good games. By fredrik carlsson, dinky daruvala and olof johanssonstenman g6teborg university, sweden final version received 24 april 2003. Our results confirm that the limitation of inequity between subjects payments implies lower effort while the elimination of losses relative to expectations decreases the variance of effort. Contracts and inequity aversion 1 abstract inequity aversion is a special form of other regarding preferences and captures many features of reciprocal behavior, an apparently robust pattern in human nature. The economists michael norton and dan ariely recently completed a survey of 5,000 americans that asked two simple questions. Tournaments, fairness, and risk american journal of. Technically speaking, we experience advantageous inequity aversion. Saito january 25, 2008 social preference under uncer. Technically speaking, we experience advantageousinequity aversion. Inequity aversion preferences in the dynamic public goods. The presence of inequity aversion alters the structure of optimal contracts.
Inequity aversion and advantage seeking with asymmetric. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. Inequity averse responders prefer to reject small offers in the ultimatum game and the proposers anticipating this, make higher offers m. The present study was inspired by what appears to be. A selfish employer can profitably exploit envy or guilt by offering contracts which create inequity off. In tournaments, the large variance in effort provision is incompatible with standard economic theory. The ability has recently been shown also in primates and dogs, raising the question of an evolutionary basis of inequity aversion. Schmidtb university of munich and cepr chapter written for the handbook of reciprocity, giftgiving and altruism this version. Transparency, inequity aversion, and the dynamics of peer. Such contracts resemble team and relative performance contracts.
More envious employees are preferred when these costs are high, less envious ones. The determination of the relevant reference group and the relevant reference outcome for a given class of individuals is ultimately an empirical question. The principal never benefits from empathy between the. The empirical analysis uses the german soep household panel for the years 1997 to 2007 to conclude. Citeseerx document details isaac councill, lee giles, pradeep teregowda.
While inequity aversion pushes towards equitable sharing, i. Contracts and inequity aversion 5 unique solution is a linear contract with slope 12. In a token exchange task we tested both behavioral. A preference foundation for fehr and schmidts model. In section 5, we show that in a team setting our model of desert nests fehr and schmidt 1999type inequity aversion over monetary payo. Standard tournament theory makes precise predictions but only when inequity and loss aversion do not affect the decision making. In this paper, we examine tournaments among inequity averse agents, who dislike disadvantageous inequity. For instance, it turns out that people have a natural aversion to inequality.
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Indeed, our conception of desert is related to the inequity aversion model of fehr and schmidt 1999, and one of the aims of our paper is to clarify this relationship. In their experiment, there was no difference in the participants contributions and, as a result, any. Inequality aversion and risk attitudes using self reported measures of life satisfaction and risk attitudes, we empirically test whether there is a relationship between individuals inequality and risk aversion. Our results support the development of theories with behavioral considerations to explain decisions in tournaments. The experimental results show that risk aversion is negatively correlated with the contribution decision of first movers. Grund and sliwka used fss insights to develop a model of tournaments where agents exhibit inequity aversion. We present first evidence that two bird species are sensitive to other individuals efforts and payoffs.
This paper provides an empirical analysis, testing the model of inequity aversion using two unique panel data sets for basketball and soccer players. In our experiment we test theoretical predictions about the role of envy and loss aversion in tournaments. The loss aversion treatment keeps incentives exactly the same as in baseline. We distinguish between direct and indirect effects of inequality aversion. The experiment was computerized using the regate software zeiliger, 2000. The intuition is obvious in the absence of inequity aversion abler workers sacrifice income if they share team revenue with a less. Furthermore, we hypothesize that domaincontingent inequality aversion is driven by the perceived scarcity of equity, and the negative asymmetric e. Parrots do not show inequity aversion scientific reports. Software company owners choose seg to sell their businesses because of our unmatched expertise. This study uses variants of dictator and trust games to provide empirical content to these models. When the concern for equity becomes more important, there is convergence. Pedro rey biel abstract we study optimal contracts when employees are averse to inequity as modelled by fehr and schmidt 1999. There is, however, no direct neural evidence of how the brain evaluates an income distribution in situations in which people have made different contributions in terms of work effort.
These two forms of inequity aversion follow different developmental trajectories, with disadvantageous inequity aversion emerging around 4 years and advantageous inequity aversion emerging around 8 years. Asked two questions to separate inequality aversion from risk aversion. Iris bohnet harvard university farzad saidi university of cambridge january 28, 2016 abstract in labor markets, some individuals have, or believe to have, less data on the deter. These predictions were further tested experimentally in a series of contests in which participants took. We qualify the notion of inequity aversion by also allowing for the possibility that agents obtain satisfaction from outperforming rivals.
Hence, by construction inequity aversion must always be at least as good as standard theory when the inequity aversion parameters can be chosen after seeing the data. We study optimal contracts in a simple model where employees are averse to inequity as modelled by fehr and schmidt 1999. We investigate the consequences of a pure income effect on the altruistic behavior of donors. Envy and loss aversion in tournaments sciencedirect. On deterministic allocations, the model reduces to the model of fehr and schmidt 1999. Adults and children are willing to sacrifice personal gain to avoid both disadvantageous and advantageous inequity. In contrast to disadvantageous inequity aversion dynamic c, the conditions a and d can not permanently be resolved to false for k0. We assume that agents care about the expected payoff differences among themselves over all periods of a game, so that it is in fact a dynamic game that is being played. List inequity aversion models have dominated the behavioral economics landscape in the last decade.
Using this concept we analyze the moral hazard problem and derive several results which di. Individuals preferences for risk and inequality are measured through choices between imagined societies and lotteries. Sectionsivandvpresent the experimental design and results, respectively. These negative responses of situation made with the monkeys support the early evolutionary origin of inequity aversion and thus helps in combination with the definitions of inequity and aversion give an overall idea of what social inequity aversion is. Inequity aversion and fair selling liang guo, 2015. Although inequity aversion is assumed to be specific to situations where. We also report the simulations which combine both risk aversion and inequity aversion in column 5 for interested readers. A critical note on the theory of inequity aversion, the journal of socioeconomics shaked, a. The current research program deals with 1 mobility and flexibility of labor. Online entry and tournament publication with the tournament planner of visual reality. These hypotheses highlight the difference between the predictions of inequity aversion and advantage seeking. The power and limits of tournament incentives briq institute.
On the basis of existing evidence on the importance of social comparisons and by formally modeling inequality aversion, we hypothesize that disappointment aversion is likely to be different when competing against another person compared to competing against nature. The principal never benefits from empathy between the workers, but he may benefit from their propensity for envy depending on the costs of assessing performance. Definition of inequality aversion inequity aversion means that people are willing to give up some material payoffs in order to achieve more equitable outcomes. Frontiers advantageous inequity aversion does not always.
Inequality aversion theories predict either no effect or a decrease in giving, whereas impure altruism theory predicts an increase in giving with an increase in the common income of donor and receiver. Our results confirm that envy implies higher effort while loss aversion increases the variance of effort. This treatment minimizes inequity and the effects of inequity aversion as. In some instances, inequity aversion is disadvantageous, as people are willing to forego a gain in order to prevent another person from receiving a superior reward. Pedro rey biel october 2002 abstract we study how the optimal contract in team production is a. Impure altruism or inequality aversion an experimental. Rohde2 january 12, 2009 1the author would like to thank itzhak gilboa, ingrid m.
This paper asks whether risk and inequity preferences are behind agents behavior in a sequential public good game. Many experiments indicate that most individuals are not purely motivated by material self interest, but also care about the well being of others. Introduction abstract we analyze the classic moral hazard problem with the additional assumption that agents are inequity averse. Sensitivity to inequity is considered to be a crucial cognitive tool in the evolution of human cooperation. Our results confirm that the limitation of inequity between subjects payments implies. In ss12, when the small proposers offer is at least 600 tokens, inequity aversion predicts that the big proposer can offer less than the small proposer and still be accepted. The principal is in general worse off, as the agent cares more about the wellbeing of the principal. The statistical analysis begins by determining whether subjects came close to playing predicted effort levels. To test this hypothesis, we conduct an experiment with two treatments. When buyers care about their surplus relative to seller profits but are uncertain about seller costs, buyers fairness perceptions and, thus, their willingness to pay may be malleable and susceptible to seller influence. The present study was inspired by what appears to be asymmetry. In four studies, we used vignettes describing inequity aversion of a made up alien species to assess peoples folk intuitions about inequity aversion. We conduct a general analysis of the effects of inequality aversion on decisions by homogeneous players in static and dynamic games.
A selfish employer can profitably exploit such preferences among its employees by offering contracts which create inequity offequilibrium and thus, they would leave employees feeling envy or guilt when they do not meet the employers demands. Income disparity, inequity aversion and the design of the healthcare system, scandinavian journal of economics 1112, pp 277 297 bergh a. As the nortonariely survey demonstrates, we tend to prefer a world in which wealth is more. Inequality aversion, risk aversion, and social welfare bianca mulaney ec426 october 3, 2016. First, inequity aversion alters the structure of optimal contracts. Envy and compassion in tournaments, journal of economics. The coevolution of fairness preferences and costly. Envy and compassion in tournaments envy and compassion in tournaments grund, christian. The economics of fairness, reciprocity and altruism experimental evidence and new theories ernst fehra university of zurich klaus m. Figures s2 and s4 reveal that preferences of symmetric inequity aversion and advantageous inequity aversion dynamics a and d make agents to quickly explore values k0.
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