Aversion to Inequality and Segregating Equilibria

• BSE Working Paper: 112239 | September 15
• Keywords: mechanism design , Contract theory , envy , social preferences , skill segregation
• JEL codes: A13, C72, D64, D80, J41
• mechanism design
• Contract theory
• envy
• social preferences
• skill segregation

This paper shows that models where preferences of individuals depend not only on their allocations, but also on the well-being of other persons, can produce both large and testable effects. We study the allocation of workers with heterogeneous productivities to firms. We show that even small deviations from purely “selfish” preferences leads to widespread workplace skill segregation. That is, workers of different abilities tend to work in different firms, as long as they care somewhat more about the utilities of workers who are “close”.