2008-05-01
Optimal contracts when a worker envies his boss
Publication
Publication
Journal of Law, Economics, & Organization , Volume 24 - Issue 1 p. 120- 137
A worker's utility may increase with his income, but envy can make his utility decline with his employer's income. This article uses a principal-agent model to study profit-maximizing contracts when a worker envies his employer. Envy tightens the worker's participation constraint and so calls for higher pay and/or a softer effort requirement. Moreover, a firm with an envious worker can benefit from profit sharing, even when the worker's effort is fully contractible. We discuss several applications of our theoretical work: envy can explain why a lower-level worker is awarded stock options, why incentive pay is lower in nonprofit organizations, and how governmental production of a good can be cheaper than private production.
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doi.org/10.1093/jleo/ewm037, hdl.handle.net/1765/27800 | |
Journal of Law, Economics, & Organization | |
Organisation | Erasmus School of Economics |
Dur, R., & Glazer, A. (2008). Optimal contracts when a worker envies his boss. Journal of Law, Economics, & Organization, 24(1), 120–137. doi:10.1093/jleo/ewm037 |