Optimal Contracts When a Worker Envies His Boss
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. The Author 2007. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: firstname.lastname@example.org, Oxford University Press.
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Volume (Year): 24 (2008)
Issue (Month): 1 (May)
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