The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents

Björn Bartling and Ferdinand von Siemens

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: While most market transactions are subject to strong incentives, transactions within Firms are often not incentivized. We offer an explanation for this observation based on envy among agents in an otherwise standard moral hazard model with multiple agents. Envious agents suffer if other agents receive a higher wage due to random shocks to their performance measures. The necessary compensation for expected envy renders incentive provision more expensive, which generates a tendency towards flat-wage contracts. Moreover, empirical evidence suggests that social comparisons like envy are more pronounced among employees within Firms than among individuals who interact only in the market. Flat-wage contracts are thus more likely to be optimal in Firms than in markets.

Keywords: Envy; moral hazard; flat-wage contracts; within-Firm vs. market interactions (search for similar items in EconPapers)
JEL-codes: D82 J3 M5 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-bec and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: The intensity of incentives in firms and markets: Moral hazard with envious agents (2010)
Working Paper: The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:115

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