Fairness, Adverse Selection, and Employment Contracts

This paper considers a firm whose potential employees have private
information on both their productivity and the extent of their
fairness concerns. Fairness is modelled as inequity aversion, where
fair-minded workers suffer if their colleagues get more income net
of production costs. Screening workers with equal productivity but
different fairness concerns is shown to be impossible if both types
are to be employed, thereby rendering the optimal employment
contracts discontinuous in the fraction of fair-minded workers. As
a result, fairness might infuence the employment contracts of all
workers although only some are fair-minded, and identical firms
facing very similar pools of workers might employ very different
remuneration schemes.