Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2004-04-26 Revision-Date: 2006-06-13 Number: 04-046/1 Author-Name: Robert Dur Author-Email: dur@few.eur.nl Author-Workplace-Name: Department of Economics, Erasmus Universiteit Rotterdam Author-Name: Amihai Glazer Author-Email: aglazer@uci.edu Author-Workplace-Name: Department of Economics, University of California, Irvine, California, USA Title: Optimal Incentive Contracts when Workers envy their Boss 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.) Classification-JEL: D23; J31; J33; M52 Keywords: Principal-agent; Envy; Compensation; Contracts; Profit-sharing; Stock options; Public vs. private production File-Url: https://papers.tinbergen.nl/04046.pdf File-Format: application/pdf File-Size: 276424 bytes Handle: RePEc:tin:wpaper:20040046