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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.

Suggested Citation

  • Bontems, Philippe, 2009. "Contracting with Agents Seeking Status," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49507, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea09:49507
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    File URL: http://purl.umn.edu/49507
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    References listed on IDEAS

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    1. Michael J. Boskin & Eytan Sheshinski, 1978. "Optimal Redistributive Taxation When Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, Oxford University Press, vol. 92(4), pages 589-601.
    2. Ireland, Norman J., 1998. "Status-seeking, income taxation and efficiency," Journal of Public Economics, Elsevier, vol. 70(1), pages 99-113, October.
    3. Corneo, Giacomo & Gruner, Hans Peter, 2002. "Individual preferences for political redistribution," Journal of Public Economics, Elsevier, vol. 83(1), pages 83-107, January.
    4. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
    5. Larry Samuelson, 2004. "Information-Based Relative Consumption Effects," Econometrica, Econometric Society, vol. 72(1), pages 93-118, January.
    6. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 963-1002.
    7. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • H0 - Public Economics - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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