Optimal Incentive Contracts For a Worker Who Envies His Boss

Robert Dur () and Amihai Glazer

No CESifo Working Paper No. 1282, CESifo Working Paper Series from CESifo Group Munich

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.

Keywords: principal-agent; envy; moral hazard; compensation; incentives; contracts; profit-sharing; stock options; public vs. private production (search for similar items in EconPapers)
JEL-codes: J31 J33 M52 (search for similar items in EconPapers)
Date: 2004
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