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Optimal Incentive Contracts when Workers envy their Boss

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Author Info

  • Robert Dur

    ()
    (Department of Economics, Erasmus Universiteit Rotterdam)

  • Amihai Glazer

    ()
    (Department of Economics, University of California, Irvine, California, USA)

Abstract

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. This discussion paper has resulted in a publication in the Journal of Law, Economics and Organization . (2008, 24(1), 120-138.)

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-046/1.

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Date of creation: 26 Apr 2004
Date of revision: 13 Jun 2006
Handle: RePEc:dgr:uvatin:20040046

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Web page: http://www.tinbergen.nl

Related research

Keywords: Principal-agent; Envy; Compensation; Contracts; Profit-sharing; Stock options; Public vs. private production;

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References

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  1. Josse Delfgaauw & Robert Dur, 2003. "Signaling and Screening of Workers' motivation," CESifo Working Paper Series 1099, CESifo Group Munich.
  2. Olmstead, Alan L & Rhode, Paul, 1985. "Rationing without Government: The West Coast Gas Famine of 1920," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 1044-55, December.
  3. Paul Oyer & Scott Schaefer, 2004. "Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories," NBER Working Papers 10222, National Bureau of Economic Research, Inc.
  4. Agell, Jonas & Lundborg, Per, 1993. "Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Working Paper Series, Research Institute of Industrial Economics 380, Research Institute of Industrial Economics.
  5. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series 1223, CESifo Group Munich.
  6. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, Elsevier, vol. 78(3), pages 275-299, November.
  7. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 423-428, March.
  8. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 14(1), pages 187-207, 03.
  9. Brainerd, Elizabeth, 2002. "Five Years after: The Impact of Mass Privatization on Wages in Russia, 1993-1998," Journal of Comparative Economics, Elsevier, vol. 30(1), pages 160-190, March.
  10. Pedro Rey-Biel, 2007. "Inequity Aversion and Team Incentives," Working Papers 319, Barcelona Graduate School of Economics.
  11. Englmaier, Florian & Wambach, Achim, 2010. "Optimal incentive contracts under inequity aversion," Games and Economic Behavior, Elsevier, Elsevier, vol. 69(2), pages 312-328, July.
  12. Haskel, Jonathan & Szymanski, Stefan, 1993. "Privatization, Liberalization, Wages and Employment: Theory and Evidence for the UK," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 60(238), pages 161-81, May.
  13. Atif Mian, 2008. "Incentives in Markets, Firms, and Governments," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 24(2), pages 273-306, October.
  14. Fershtman, Chaim & Hvide, Hans K & Weiss, Yoram, 2003. "Cultural Diversity, Status Concerns and the Organization of Work," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3982, C.E.P.R. Discussion Papers.
  15. Agell, Jonas & Lundborg, Per, 1992. "Fair wages, involuntary unemployment and tax policies in the simple general equilibrium model," Journal of Public Economics, Elsevier, Elsevier, vol. 47(3), pages 299-320, April.
  16. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 55(1), pages 18-45.
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Citations

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Cited by:
  1. Shchetinin, Oleg, 2008. "Altruism and Career Concern," MPRA Paper 9414, University Library of Munich, Germany.
  2. Florian Englmaier & Stephen G. Leider, 2008. "Contractual and Organizational Structurewith Reciprocal Agents," CESifo Working Paper Series 2415, CESifo Group Munich.
  3. Brice Corgnet & Roberto Hernán-González & Stephen Rassenti, 2011. "Real Effort, Real Leisure and Real-time Supervision: Incentives and Peer Pressure in Virtual Organizations," Working Papers, Chapman University, Economic Science Institute 11-05, Chapman University, Economic Science Institute.

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