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Contracting with Agents Seeking Status

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  • Bontems, Philippe

Abstract

We explore in this paper the consequences of status seeking preferences among agents contracting with a private principal in the context of production. We examine in particular the case of envy and we show that in general envy entails augmented distortions due to asymmetric information in optimal contracts. Furthermore if the principal neglects the preferences of the agents with respect to status, then potentially there is under-participation to the contract. We also show that if the principal is free to choose who can participate to the contract, then under some conditions the principal may prefer to contract with only a subset of potentially "profitable" agents (that is where his utility is strictly positive). We then ask whether contracting with agents seeking status would yield to more incentives to exert unobservable effort. We actually show that the principal has incentives to discourage effort. In the last part of the paper, we consider the case of costly observation of private decisions so that we investigate whether envy encourages non compliance or not.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49507.

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Date of creation: 2009
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Handle: RePEc:ags:aaea09:49507

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Keywords: status; adverse selection; contracts; envy; externalities; Production Economics; D6; H0; D86;

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  1. Ireland, Norman J., 1998. "Status-seeking, income taxation and efficiency," Journal of Public Economics, Elsevier, vol. 70(1), pages 99-113, October.
  2. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
  3. Corneo, Giacomo & GrĂ¼ner, Hans Peter, 2001. "Individual Preferences for Political Redistribution," CEPR Discussion Papers 2694, C.E.P.R. Discussion Papers.
  4. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 589-601, November.
  5. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
  6. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  7. Larry Samuelson, 2004. "Information-Based Relative Consumption Effects," Econometrica, Econometric Society, vol. 72(1), pages 93-118, 01.
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