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The impact of envy on relational employment contracts

  • Kragl, Jenny
  • Schmid, Julia

We study the effects of envy on relational employment contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which reflects an agent's individual contribution to firm value. Both agents exhibit horizontal disadvantageous inequity aversion. In contrast to the literature, we find that inequity aversion may be beneficial; in the presence of envy, for a certain range of interest rates, relational contracts may be more profitable. For some interest rates reputational equilibria exist only with envious agents.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 72 (2009)
Issue (Month): 2 (November)
Pages: 766-779

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Handle: RePEc:eee:jeborg:v:72:y:2009:i:2:p:766-779
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  12. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
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  14. Kvaløy, Ola & Olsen, Trond E., 2005. "Team Incentives in Relational Employment Contracts," Discussion Papers 2005/7, Department of Business and Management Science, Norwegian School of Economics.
  15. Bartling, Björn & Siemens, Ferdinand von, 2006. "The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents," Discussion Papers in Economics 913, University of Munich, Department of Economics.
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