Rey-Biel, Pedro - In: Scandinavian Journal of Economics 110 (2008) 2, pp. 297-320
We study optimal contracts in a simple model where employees are averse to inequity, as modeled by <link rid="b20">Fehr and Schmidt (1999)</link>. A "selfish" employer can profitably exploit "envy" or "guilt" by offering contracts which create inequity off-equilibrium, i.e., when employees do not meet his demands....