Multi-tasking and inequity aversion in the linear–exponential–normal moral hazard model

Abstract

This paper analyzes the impact of wage comparisons among inequity-averse agents on optimal incentive intensities in a linear–exponential–normal moral hazard model with multi-tasking. We consider individual and team production tasks that differ in that only individual production causes wage inequality. If the tasks are substitutes in the agents’ effort cost functions, the principal might want to balance incentives and reduce the agents’ overall inequality exposure. We show that team production incentives can then be muted below the level that results from noisy measurement and risk aversion alone—even though team production does not cause wage inequality.