For a Principal-Agent model when the Agent is inequity averse, different definitions of inequity exist in the literature. Let principal's profit be P, effort e, wage w and c(e) effort costs. Then inequity D is sometimes defined as D = P - [w-c(e)], meaning the agent compares profit with her net utility. Sometime, the definition is D = P - w, meaning the agent only compares profit and her own wage.

From a standard economics theory-perspective, the second option may seem odd: Why should an agent acknowledge her effort costs for the actual decision of how much effort to excert but not for inequity? However, from a behavioral economics perspective for me it seems reasonable that the agent might just compare monetary terms, i.e. profit and wage, for inequity.

Is anyone aware of literature that could help going the one or the other direction - empirical or experimental? I was thinking about literature on reference points and what exactly constitutes a reference point (monetary or non-monetary?), for example.

Any suggestions will be helpful and I thank you in advance!

Best,

Silvio