How Incentives Increase Inequality

Abstract

Abstract. We determine the optimal level of bonuses in the case of Co-production between an agent and multiusers. There is Co-production when the outcome is the result of both the agent's effort and the user's effort and type. Paying bonuses to the agent encourages him to vary his effort according to the user he meets. This variety in the agent's effort results in an increase in inequality. Hence, the optimal level of bonuses is muted when the principal cares about equality among users. This is typically the case in education or health.

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