Wage Bargaining when Workers Have Fairness Concerns

摘要: We analyze optimal labor contracts when workers are inequity averse towards the employer. Welfare is maximized for an equal sharing rule of surplus between worker and firm. That is, profit even if effort contractible. If firm can make a take-it-or leave-it offer, contract also dependent on output but always suboptimal with respect to welfare. When parties bargain over contract, division more equitable compared purely self-regarding case. Moreover, agreement approaches welfare-optimal as parties' bargaining power converges. Our findings imply that raising less powerful party may increase welfare.