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Optimal Incentive Contracts For a Worker Who Envies His Boss

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  • Robert Dur
  • Amihai Glazer

Abstract

A worker’s utility may increase in his own income, but envy can make his utility decline with his employer’s income. Such behavior may call for high-powered incentives, so that increased effort by the worker little increases the income of his employer. This paper uses a principal-agent model to study optimal incentive contracts for envious workers under various assumptions about the object and generality of envy. Envy amplifies the effect of incentives on effort and, therefore, increases optimal incentive pay. Moreover, envy can make profitsharing optimal, even when the worker’s effort is fully contractible. We discuss several applications of our theoretical work. For example, envy can explain why lower-level workers are awarded stock options, why incentive pay is usually lower in non-profit organizations, and higher in larger firms. Envy may also make governmental production of a good more efficient than private production.

Suggested Citation

  • Robert Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts For a Worker Who Envies His Boss," CESifo Working Paper Series 1282, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1282
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    Cited by:

    1. Florian Englmaier & Stephen Leider, 2012. "Contractual and Organizational Structure with Reciprocal Agents," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 146-183, May.
    2. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo Group Munich.

    More about this item

    Keywords

    principal-agent; envy; moral hazard; compensation; incentives; contracts; profit-sharing; stock options; public vs. private production;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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