Social Preferences and the Distribution of Rewards

Motivated by the potential tension between coordination, which may require discriminating between identical agents, and social comparisons, which may call for small pay differentials, we analyze the optimal reward scheme in an organization involving agents with social preferences whose tasks are complementary. Although a tension exists between the effects of inequality aversion and altruism, there is always more reward inequality when agents are inequality-averse and altruistic than when they are purely self-interested. We then highlight how our results differ when agents are not altruistic but rather inequality-averse a la Fehr and Schmidt (1999).