Desert preferences and moral hazard in teams

Abstract

In teams, an agent with a higher effort may feel that he is not getting what he deserves if he is paid the same as an agent who exerts lower effort. If agents exert the same effort levels, the one who fails due to factors beyond his reach may feel that he is not paid what he deserves if the other one succeeds and receives a higher wage. Also, low effort providers may feel guilt or elation over receiving more than they deserve. We consider a moral hazard problem within a team of two agents who have desert preferences a la Gill and Stone (2015). We find that the set of optimal wage ` schemes shrinks, and the optimal wage scheme exhibits JPE only. Desert disutility negatively affects an agent’s incentive constraint when both agents put the same effort and only one of them succeeds and gets more. This forces the principal to eliminate any possible desert disutility by offering a JPE contract. Moreover, desert preferences have a quantitative effect on agents’ expected payoffs and principal’s expected wage payments through desert guilt component. The principal’s expected payment decreases (increases) as desert guilt (elation) gets stronger.