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Incentives and Discrimination

Eyal Winter

The Hebrew University, Department of Economics and the Center for the Study of Rationality, Jerusalem 91904, Israel.

Optimal incentive mechanisms may require that agents are rewarded differentially even when they are completely identical and are induced to act the same. We demonstrate this point by means of a simple incentive model where agents’ decisions about effort exertion is mapped into a probability that the project will succeed. We give necessary and sufficient conditions for optimal incentive mechanisms to be discriminatory. We also show that full discrimination across all agents is required if and only if the technology has increasing return to scale. In the non-symmetric framework we show that negligible differences in agents’ attributes may result in major differences in rewards in the unique optimal mechanism.(This abstract was borrowed from another version of this item.)

DOI

10.1257/0002828041464434

Volume

94 (3)

Pages

764-773

Language

en

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