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Title:Relational contracts and inequity aversion PDF Logo
Authors:Kragl, Jenny
Schmid, Julia
Issue Date:2006
Series/Report no.:SFB 649 discussion paper 2006,085
Abstract:We study the effects of envy on the feasibility of relational contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which reflects the agent's individual contribution to firm value. Both agents exhibit disadvantageous inequity aversion. In contrast to the literature, we find that inequity aversion may be beneficial: In the presence of envy, for a certain range of interest rates relational contracts may be more profitable. Furthermore, for some interest rates reputational equilibria exist only with inequity averse agents.
Subjects:principal-agent
relational contract
inequity aversion
envy
JEL:D63
D82
M52
M54
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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