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Fairness Concerns in Heterogeneous Teams: Utility, Reward, and Income (Revision 1 )

Working Paper
Problem Definition: In homogeneous teams, stimulating inequality aversion among agents is a silver bullet: it leads to higher output while being fair, on all possible dimensions of fairness: utility, reward, and income. Is this result still true in heterogeneous teams when agents might respond differently to incentives? Methodology/Results: The authors consider a principal two-agent model in which agents of different abilities are inequality-averse between each other, on one of the following three types of fairness consideration: utility, reward, and income. They analytically show that whether inequality aversion benefits the principal depends on the type of fairness consideration and the degree of agent heterogeneity. Specifically, the authors find that stimulating utility fairness does not benefit the principal and gives rise to inequalities when the agents are highly heterogeneous; but that it does benefit the principal without creating inequalities when agents are only moderately heterogeneous. Stimulating reward fairness wins on both fronts: It always benefits the principal and results in no inequalities. Stimulating income fairness hurts potentially on both fronts: It always lowers the principal’s payoff and inequalities may arise. Managerial Implications: This research indicates that stimulating inequality aversion (e.g., through performance and pay transparency) can backfire under the wrong type of fairness consideration and/or if the team is too heterogeneous. In general, stimulating inequality aversion when workers compare their rewards is a safer bet than when they compare their utilities; and it should be avoided when they compare their incomes.
Faculty

Assistant Professor of Technology and Operations Management

Professor of Technology and Operations Management