Optimal Contracts When a Worker Envies His Boss

Posted: 23 Jun 2008

See all articles by Robert Dur

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Amihai Glazer

University of California, Irvine - Department of Economics

Date Written: May 2008

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.

Suggested Citation

Dur, Robert and Glazer, Amihai, Optimal Contracts When a Worker Envies His Boss (May 2008). The Journal of Law, Economics, & Organization, Vol. 24, Issue 1, pp. 120-137, 2008. Available at SSRN: https://ssrn.com/abstract=1150041 or http://dx.doi.org/10.1093/jleo/ewm037

Robert Dur (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

FEW / H 8-15
P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31-10-4082159 (Phone)
+31-10-4089161 (Fax)

HOME PAGE: http://people.few.eur.nl/dur

Tinbergen Institute

Amsterdam/Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Amihai Glazer

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States
949-854-6563 (Phone)
949-824-2182 (Fax)

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