A NOTE ON ENVY AND EARNINGS INEQUALITY UNDER LIMITED LIABILITY CONTRACTS (2016)
Author: Kangsik
Cho
Abstract
The paper analyzes an
ex-ante contracting with limited liability constraints when agents feel envious
of others' higher wages. We show that depending on the degree of limited
liability constraints, the principal requires various distortions in output at
both the top and bottom productivity levels for agent's type. Compared to the
result without envy, the output gap between efficient and inefficient agents is
less spread out. Moreover, when the degree of envy is sufficiently large,
bunching can always occur. Hence, the first-best solutions for both types of
agent are never obtained with envy regardless of the burden of limited
liability.
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