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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Keywords compensation, contracts, envy, incentives, moral hazard, principal-agent, profit-sharing, public vs. private production, stock options
JEL Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc. (jel J31), Compensation Packages; Payment Methods (jel J33), Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues) (jel M52)
Persistent URL dx.doi.org/10.1093/jleo/ewm037, hdl.handle.net/1765/27800
Journal Journal of Law, Economics, & Organization
Dur, A.J, & 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