scopus: cited 21 times
web of science: cited 17 times
Optimal contracts when a worker envies his boss
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.
- stock options
- moral hazard
- public vs. private production
- M52 : Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
- J33 : Compensation Packages; Payment Methods
- J31 : Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc.