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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. Oyer, Paul & Schaefer, Scott, 2004. "Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories," Research Papers 1772r, Stanford University, Graduate School of Business.
  2. Agell, Jonas & Lundborg, Per, 1995. " Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 295-307, June.
  3. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November.
  4. Grund, Christian & Sliwka, Dirk, 2002. "Envy and Compassion in Tournaments," IZA Discussion Papers 647, Institute for the Study of Labor (IZA).
  5. Olmstead, Alan L & Rhode, Paul, 1985. "Rationing without Government: The West Coast Gas Famine of 1920," American Economic Review, American Economic Association, vol. 75(5), pages 1044-55, December.
  6. 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.
  7. Agell, Jonas & Lundborg, Per, 1992. "Fair wages, involuntary unemployment and tax policies in the simple general equilibrium model," Journal of Public Economics, Elsevier, vol. 47(3), pages 299-320, April.
  8. Delfgaauw, Josse & Dur, Robert, 2007. "Signaling and screening of workers' motivation," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 605-624, April.
  9. Englmaier, Florian & Wambach, Achim, 2005. "Optimal Incentive Contracts under Inequity Aversion," IZA Discussion Papers 1643, Institute for the Study of Labor (IZA).
  10. Pedro Rey-Biel, 2007. "Inequity Aversion and Team Incentives," Working Papers 319, Barcelona Graduate School of Economics.
  11. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  12. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series 1223, CESifo Group Munich.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
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Citations

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Cited by:
  1. 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 11-05, Chapman University, Economic Science Institute.
  2. Florian Englmaier & Stephen Leider, 2012. "Contractual and Organizational Structure with Reciprocal Agents," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 146-83, May.
  3. Shchetinin, Oleg, 2009. "Altruism and Career Concerns," TSE Working Papers 09-093, Toulouse School of Economics (TSE).

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