Inequality Aversion, Risk and Incentive in Teamwork

A standard HM model is built on the basic assumptions that agents have no inequality aversion. We introduce inequality into this principal-agent model to study the interaction of inequality aversion, risk and incentive, then compare with the conclusions of the standard HM model. The results of the study are followed. Inequality aversion and the risk of agent's individual task is positively related. High-risk tasks should be assigned to the team and low-risk tasks should be assigned to individuals to reduce the agency costs of incentive. Compared with the conclusions of the HM model, inequality aversion increases agency costs, reduces the incentive for individual performance and has no impact on the incentive for team performance.