Fair allocation with unequal production skills: The no envy approach to compensation

We consider a simple production model and assume that the agents have unequal production skills that can in no way be considered their responsibility. We study how it is possible, if at all, to compensate for differential skills while holding agents responsible for their preferences towards consumption and leisure. Our main result is a characterization of a class of solutions, called the Reference Welfare Equivalent Budget. In this class, each solution is based on reference preferences, and selects allocations in which the agents' budget sets are deemed equivalent by these reference preferences.