Optimal Incentive Contracts When Workers Envy Their Boss

Tinbergen Institute Discussion Paper No. TI 2004-046/1

32 Pages Posted: 29 Apr 2004

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: April 26, 2004

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 employs 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 profit-sharing 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

JEL Classification: J31, J33, M52

Suggested Citation

Dur, Robert and Glazer, Amihai, Optimal Incentive Contracts When Workers Envy Their Boss (April 26, 2004). Tinbergen Institute Discussion Paper No. TI 2004-046/1. Available at SSRN: https://ssrn.com/abstract=536622 or http://dx.doi.org/10.2139/ssrn.536622

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)

Register to save articles to
your library

Register

Paper statistics

Downloads
144
Abstract Views
1,017
rank
201,999
PlumX Metrics